BVC makes a range of paints. It exports 60% of its products. The Managing Director has been looking at BVC's cash-flow forecast shown in Table 2. He said: 'Success is not just about our return on capital employed.' The Managing Director is worried about the introduction of new legal controls to protect the environment. This will mean BVC will have to reduce the number of chemicals that are used to make paint. He thinks these new legal controls will be bad for business. Table 2: Extract of cash flow forecast for the period July-September 2019 ($000) | | July | August | September | |:----------------------------|:-----|:-------|:----------| | Cash inflow | 600 | 560 | 620 | | Cash outflow | 560 | 540 | 580 | | Net cash flow | 40 | 20 | Y | | Opening balance | X | 60 | 80 | | Closing balance | 60 | 80 | 120 |

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. [2] Clear understanding [2]: measures the amount of profit made for each dollar invested; Profit of a business expressed as a percentage of capital invested; Formula: Profit / Capital employed × 100; Some understanding [1]: e.g. profit / money made on investment
2. [2] Application [2 × 1] award 1 mark for each correct answer; X 20 (20 000); Y 40 (40 000)
3. [4] Knowledge [2 × 1] - award 1 mark for each relevant reason; Application [2 × 1] - award 1 mark for each explanation in context; Relevant points might include: Can identify possible causes of cash flow problems [k] e.g. as in August, cash-in is 40 000 lower than July [app]; Help manage cash flow better OR help avoid cash flow problems [k]; Supports a loan application / attract investors [k] as opening balance should improve from $20000 to $80 000 over the 3 months [app]; Show how much is spent each month [k]
4. [6] Knowledge [2 × 1] – award 1 mark for each relevant problem; Application [2 × 1] - award 1 mark for each relevant reference made to this business; Analysis [2 × 1] - award 1 mark for each relevant explanation; Relevant points might include: Different tastes [k] e.g. different countries might prefer different paint colours [app] adding to production costs [an]; Different standards/legislation [k] so may not be able to use certain chemicals [app] stopping possible sales [an]; Effect of exchange rates [k] as an appreciation in own currency would mean its products are more expensive [an] so not able to export as much as 60% [app]; Knowledge of market OR competition [k]; Tariffs [k]; Quotas [k] will restrict numbers of products that can be sold [an]; Increased costs of transport/ increased risk of delay [k]; Increased competition [k]
5. [6] Knowledge [1] – award 1 mark for identification of relevant issue(s); Application [1] – award 1 mark for a relevant reference made to this business; Analysis [2] – award up to 2 marks for relevant development of point(s); Evaluation [2] – justified decision made as to whether the new legal controls to protect the environment will be bad for business; Points might include: Increased costs [k] from new paint production methods [app] which could lead to higher prices [an] and therefore less demand [an]; Reduces quality [k] by removing some of the chemicals [app] leading to customer complaints [an]; Competitors also affected by new laws [k] so BVC could still remain competitive [an]; New rules may not apply in some of their markets [k] as 60% are exported [app]; Customers may be willing to pay more for environmentally friendly products [k] so the business could increase their profit margin [an]