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Assess VisionSpring’s decision to finance its growth using retained profits - Edexcel - A-Level Business - Question 1 - 2019 - Paper 2
Question 1
Assess VisionSpring’s decision to finance its growth using retained profits. Retained profit is a source of internal finance kept by the business, rather than distr... show full transcript
Worked Solution & Example Answer:Assess VisionSpring’s decision to finance its growth using retained profits - Edexcel - A-Level Business - Question 1 - 2019 - Paper 2
Step 1
Arguments for retained profits
Answer
Retained profits provide VisionSpring with essential funds without incurring debt obligations. This funding allows them to reinvest fully into their business model, which is easily profitable due to a 100% mark-up on glasses sold. By relying on retained profits, VisionSpring efficiently maintains control over its finances, avoiding any cost associated with external funding sources.
Step 2
Possible counterbalance
Answer
While retained profits offer many advantages, they are limited in scope. An established business may secure more significant liquidity through loans or alternative financing methods, which could provide an upfront capital boost not possible through retained profits. Additionally, if VisionSpring uses its retained profits inefficiently, it may find itself unable to meet future financial demands.
Step 3
Potential judgement
Answer
Overall, while the decision to use retained profits may foster independence for VisionSpring, it could also hinder the company's ability to scale quickly compared to an established competitor like ITC, which can leverage existing relationships and market experience to access funding more rapidly. Therefore, while retained profit serves as a viable option, VisionSpring must remain aware of the limitations that can arise from solely relying on it for growth.