Financial Terms & Calculations (AQA GCSE Business)

Sonya has been running Bambino Parties for two years. Last year she made a profit of £8 000 and now wants to increase the number of parties by 20%.

A friend recently started to work for Sonya on a part time basis. She designs backgrounds for parties and these have proved very popular. Her friend has asked if she can become a partner in Bambino Parties. She is willing to invest £3000 into the business in return for 50% of the profits and will work full time to help expand the business.

When Sonya takes a booking for a party she asks for a 10% deposit and then receives the rest of the agreed price after the party. Her suppliers, people who provide venues, catering, and birthday cakes, expect to be paid in advance. She is worried about the effect this will have on cash flow.

Sonya has produced a cash flow forecast.

Figure 2

Fleet Bikes is a United Kingdom (UK) business which manufactures high quality adult road bikes to sell to retailers. Orders from retailers are expected to be delivered within two weeks. There are lots of competitors for adult bikes. To increase its share of the bike market, the business has decided to develop its own range of children’s bikes. A loan will be required to fund a factory extension. The business is aiming to reduce production costs.

The factory uses total quality management (TQM). The production of bikes uses steel and aluminium. The price of these raw materials goes up and down daily. Each month Fleet Bikes estimates the amount of steel and aluminium which it will need in advance for production. These large orders are delivered within a week and take up all the space in its warehouse. Currently, Fleet Bikes receives a 10% discount from its main supplier for large orders. The supplier can deliver smaller amounts within three hours for an extra cost.

Children’s bikes will be sold only on Fleet Bikes’ website. Customers will expect quick delivery and many of the bikes will need to be manufactured and then sent to the customer within 24 hours of receiving the order.

Swim to Success (STS) is a programme that teaches young children how to swim through weekly lessons. It was developed by Jade Jackson, an ex-Olympic swimmer. Jade employs swimming instructors who deliver the programme using the pool facilities at gyms across the North East of England.

Information:

Jade set STS up as a sole trader because she wanted to make the key business decisions herself. Initially Jade used a bank loan as her main source of finance and secured the loan against her home which she owns.

Jade would like to expand STS. However, she is struggling to raise the finance herself as her costs are still high. To help her manage financially Jade has arranged an overdraft on her business bank account. She relies on this to pay employees if the business does not have enough cash at the end of the month. Jade has recently received a letter from the bank explaining that interest rates on bank loans and overdrafts are going to increase.

HelloFresh has experienced rapid growth and now has more than 1.45 million customers worldwide. In 2017 it became a public limited company and is now aiming to break even.

In the UK, the selling price for one HelloFresh meal is around £5 per person with a minimum order value of £34.99. In a 2017 survey 59% of people said they had never subscribed to a meal-kit delivery service because it was too expensive, however the target market for HelloFresh expect a high-quality product and this requires a certain level of cost. For example, HelloFresh work with local suppliers to source seasonal, fresh food and its meal-kits are packaged mainly using recycled materials instead of cheaper solutions which have a more negative impact on the environment.

HelloFresh focuses its marketing activity online, including social media, to advertise meal-kits to its target market. HelloFresh sometimes combines advertising with a sales promotion, such as 50% off your first box, to attract new customers to its subscription service. Marketing is very important to HelloFresh as it operates in an increasingly competitive environment. In 2018 one major competitor launched a TV advertising campaign costing £2 million. HelloFresh incurred marketing expenses of £140 million in 2016 which increased to £215 million in 2017.

Table 1: Adapted from HelloFresh Extract of Income Statement (Euros have been converted to pounds)

Reusable drinks bottles are becoming more popular. Jake Webb is a product designer. A couple of years ago, Jake noticed that young people wanted to drink cold water on the go without having to buy single-use plastic bottles. He thought there was a gap in the market for lightweight, stylish bottles. Last year, Jake developed a product he called the BEco Bottle. He bought some second-hand equipment to begin manufacturing bottles. The equipment can only produce small quantities meaning the unit cost per bottle is high.

The development of the BEco Bottle was very expensive so Jake used a price skimming strategy to recover his costs. However, competitors have recently launched very similar bottles and are selling these at a lower price. Jake has found out that 90% of people identify price as the most important factor when making a purchase.

Recently, sales of skateboards have fallen. To widen its product portfolio, Skate4U Ltd is considering entering a new market by developing a range of low-price scooters (non-motorised). The scooter market has grown rapidly in the last three years and is dominated by four businesses that receive 80% of the sales revenue in the market.

Skate4U Ltd currently sells high-price skateboards using high-quality materials. There are concerns about the possible negative impact on Skate4U Ltd’s brand image if it begins selling low-price scooters. Skate4U Ltd will need to set clear sales targets to make sure the business will make a profit from the sale of scooters. The business can produce 10,000 scooters a year.

The market leader has recently run a successful sales promotion offering a signed scooter as a prize to the customer who creates the best new scooter design. This promotional activity resulted in an increase in its sales of 10%. Skate4U Ltd is considering which methods of promotion would be best to help gain brand awareness when entering the scooter market. Skate4U Ltd will promote the new scooters to its current market of skateboard users.

Budget airline Skyline plc is going to add a new route to the city of Sibiu in Romania. An additional plane will require extra investment of £72 million. Based on the age of the plane being considered for purchase, it is estimated that it has 12 years of service left. The plane will increase Skyline plc’s profit by £108 million over its lifetime.

Skyline plc has a large database of customers. It would like to set up a telesales team to call all past and present customers individually to tell them about the new route. Not all customers have indicated that they would be happy to be contacted by telephone.

Each member of the telesales team will:

• Inform customers about the city of Sibiu and then encourage them to book flights

• Be provided with some information about Sibiu, but not a formal script to use

• Be expected to contact at least 12 customers per hour.