Thamir is an entrepreneur who built up an international retail business. He is now a multi-millionaire who provides venture capital. Thamir is currently deciding whether to purchase 50% of the shares in Clothing Line (CL) which is a private limited company. CL is an online clothing retailer which has been operating for five years. The owners cannot finance further internal growth and have invited Thamir to invest in the business. CL purchases clothing from a number of suppliers. CL places orders for items of clothing each month. The clothes are then delivered to a large warehouse where employees sort and package individual items ready for sending to customers when they are ordered. CL has published its latest accounts and Thamir has obtained a copy of them. A summary is shown in Fig. 1. [Figure 1: Summary of CL's published accounts on 31 December 2017 ($000s)] Income statement Revenue: 500 Gross profit: 150 Profit for the year: 50 Statement of financial position Non-current assets: 760 Current assets: 200 Current liabilities: 40 Non-current liabilities: 500 Equity and reserves: 420 CL has a very popular website where customers order their clothes. Products that are ordered by 18:00 each day are guaranteed to be delivered to customers the next day. This means that CL must hold high levels of buffer inventory. Thamir is concerned that the business is holding too much inventory which may lose value over time. He has told the current owners of CL that he will only invest in the company if they introduce a just-in-time (JIT) system of inventory management.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [1] (a)(i) One mark for an understanding that this is a source of finance (from the business perspective) or an investment (from the entrepreneurs perspective) e.g. Source of finance/investment/equity/funds.
2. [1] (a)(i) One mark for an understanding that this is risky, or for a risky purpose – do not allow 'risk' on its own as all investments have risk e.g. Provided for high risk/risky/risker/new businesses/high growth/innovations.
3. [3] (a)(ii) When a business expands its own operations using internal sources of finance. Known as organic growth.
4. [1] (a)(ii) Explanation of growth – expansion, getting bigger, opening more stores/factories/outlets etc.
5. [1] (a)(ii) Explanation of internal (in terms of growth), – using own funds, reinvesting etc. or in terms of NOT merging/taking over another business (do not allow not external).
6. [1] (a)(ii) Example (an example needs to be specific – not the same as items in the A mark) or some other way of showing good understanding, for example AKA organic growth or less risky than external growth, higher cost, higher profitability etc.
7. [2] (b)(i) Correct answer with or without correct working.
8. [1] (b)(i) Formulae or identification of correct figures.
9. [8] (b)(ii) Historical - Published accounts are backward looking and will not tell Thamir much about the current state of the business for his investment. Is the business worth the same now as it was when the accounts were published. Also these accounts are from 31/12/17 so half a year out of date.
10. [8] (b)(ii) Need something to compare the accounts with – this is only one year, so there is nothing to compare with for Thamir to know if CL is improving or not.
11. [8] (b)(ii) Need other businesses within industry to compare – no other businesses in the clothing industry to compare CL's accounts with.
12. [8] (b)(ii) Non-financial assets are not included, e.g. human resources, management. May not give the full picture to Thamir. Only includes quantitative values.
13. [8] (b)(ii) Income statement only shows totals for the year.
14. [8] (b)(ii) Statement of financial position only a snapshot of a business at one point in time.
15. [8] (b)(ii) Market is dynamic and changes will not be reflected in the historical account.
16. [8] (b)(ii) Accept reference to what is missing from the given accounts (fig 1) as contextual (even though the data might appear in the published accounts), e.g. no inventory shown.
17. [4] (c) Risk taker.
18. [4] (c) Leadership skills.
19. [4] (c) Energy and enthusiasm.
20. [4] (c) Self-belief and confidence.
21. [4] (c) Persistence and drive.
22. [4] (c) Ability to work under pressure.
23. [4] (c) Creativity and imagination.
24. [4] (c) Multi-skilled.
25. [4] (c) Dynamic.
26. [11] (d) Suppliers - at the moment the suppliers deliver once a month but just in time will require more regular deliveries (perhaps daily). This is likely to increase the costs of the supplier which they may or may not pass on to CL. Will CL need to change to closer suppliers?
27. [11] (d) Current owners could require significant investment. May also be savings to be made on the large warehouse that may not be needed any more.
28. [11] (d) Employees - May be made redundant if they work in the warehouse – alternatively their job may change to distribution rather than warehouse.
29. [11] (d) Customers - used to next day delivery, but this may not be possible if clothes have to be ordered from suppliers after they have been ordered by the customer.
30. [11] (d) Thamir - Condition of him investing in CL.