IGCSE, A Level Business Student Forum

Kara’s business makes wax candles. She sells them to retailers at low prices. She gives retailers 60 days to pay. Kara has to pay her suppliers when raw materials are delivered. Kara used crowd-funding to set up her business. The bank would not give Kara a loan as she did not have a business plan. Last year revenue was $50 000.

Demand is increasing but Kara is not yet able to benefit from economies of scale. She said: ‘Cash-flow is a problem. All cash inflows are used to buy inventory.’

02 Outline two reasons why a bank might want Kara to produce a business plan before agreeing to give a loan. [6]

Possible KN Points;
[KN] To check if Kara's business has the ability to pay back the loan from expected profits
[KN] To show how much seriously she has taken care of business issues like cash flows

[KN] To check if Kara's business has the ability to pay back the loan from expected profits
[APP]Kara's business is currently facing growing demand, and her revenue from last year was $50,000. However, the bank cannot depend on past revenue alone. She is not yet seeing benefits from economies of scale, which means her current profit margins could be low.A business plan turns Kara's optimism about increasing demand into concrete financial evidence that she can generate enough cash to cover the loan.

[KN] To check the current cash flow of the business (current cash flow position)
Top
[APP]Kara didn’t mince words—she said, Cash-flow is a problem and pointed out that every bit of cash coming in just goes straight to buying more inventory. The bank knows all about her cash flow headaches. She has to pay her suppliers right away when the raw materials show up, but her retailers? They get two months to pay her back. That leaves her stuck with a big gap in cash.

[KN] To check if Kara's business has the ability to pay back the loan from expected profits
App:The bank needs to assess the risk associated with lending money to Kara. By reviewing the business plan's projected profit and loss statements, the bank can determine if the expected future profits are sufficient to cover the loan repayments and intrest
Ann: bank to gauge the long-term viability and creditworthiness of the business ensuring a higher likelihood of recovering the funds lent.
[KN] To check the current cash flow of the business (current cash flow position)
App: [KN] The business plan includes cash flow forecasts, which detail the expected movement of cash into and out of the business over a specific period. The bank needs to see a positive or manageable cash flow to ensure that Kara's business will have enough liquid assets at any given time to make timely loan repayments, even if the business is profitable on paper but cash-poor in reality.
Ann: This helps prevent short-term liquidity problems that could lead to default.

[KN] To check if Kara's business has the ability to pay back the loan from expected profits.

[APP] Karas business plan will show the bank her costs cashflow and how she will manage expenses.

[AN] This help's the bank decide that if kara would be able to repay the loan and this reduces the risk of loss for the bank.
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[KN] To check the current cash flow of the business (current cash flow position)

[APP] : The business plan will include details about her cashflows such as revenue,expenses and cost for machinery.

[AN] This shows the bank that Kara is managing her business responsibly and will use the loan safely and the bank will be able to approve the loan without risk.

[KN] To check if Kara's business has the ability to pay back the loan from expected profits
[APP] Since Kara's business demand is increasing which means now she would require more funds for working capital (day to day expenses)
[AN] If the profits are more than the amount of interest, Kara will be able to manage these working capital expenses easily, which means she can focus more on business growth rather arrangement of cash. Now she can expand her business in other regions easily leading to economies of scale.

[KN] To show how much seriously she has taken care of business issues like cash flows
[APP] Since Kara is offering 60 days credit to her retailers (customers), this means bank would check her credit terms with supplier as well.
[AN] As if the suppliers are offering lesser than 60 days, this means every new sale would create a pressure on cash flows for the business. This means now Kara will not be in a position to pay-back the loan (increased chances of bad debts) leading to bankruptcy in the future which means now the bank will not be able to recover any amounts too.