Explain how one internal source and one external source of finance could be used by FO as it expands.

Mark scheme

Marking points from the official mark scheme (May/June 2021). The mark or mark type is shown in brackets.

1. [1] (a) Internal source of finance: Retained profit – nothing to repay / no interest to pay – keeps expenses down
2. [1] (a) Internal source of finance: Sale of existing non-current assets – these might be unused equipment and not affect existing production levels
3. [1] (a) Internal source of finance: Sale of inventories to reduce inventory levels
4. [1] (a) External source of finance: Bank loan - easier to obtain due to previous business success – repayments can be spread out over several years
5. [1] (a) External source of finance: New share issue – existing shareholders may be willing to increase their investment due to business success – may be able to attract more family and friends for investment in new capital
6. [1] (a) External source of finance: Grants and subsidies from the government – funds may be available from the government to support sustainable businesses – FO would qualify for these grants – do not have to be repaid
7. [1] (a) External source of finance: Debentures
8. [1] (a) External source of finance: Crowd-funding
9. [1] (a) Application might include: FO is a private limited company, FO has been operating for 20 years, FO is a sustainable business, for many years’ shareholders have reinvested profits, FO recently took over two other furniture businesses, FO plans further takeovers, FO is quite a large business.
10. [1] (b) Wholesaler Advantages: Buys tables in large quantities - fewer deliveries needed – reducing distribution costs
11. [1] (b) Wholesaler Advantages: Saves storage space for manufacturer
12. [1] (b) Wholesaler Advantages: Lower administration costs as fewer orders to process
13. [1] (b) Wholesaler Advantages: May give advice to manufacturer on what furniture sells well
14. [1] (b) Wholesaler Advantages: May undertake some of the marketing to retailers/customers – boost sales - reduce marketing costs for FO
15. [1] (b) Wholesaler Disadvantages: Prices of chairs and tables may be higher as wholesaler needs to add their mark up
16. [1] (b) Wholesaler Disadvantages: Wholesaler may not want to buy the full range of products
17. [1] (b) Wholesaler Disadvantages: May also sell competitors' products
18. [1] (b) Wholesaler Disadvantages: Longer chain of distribution - longer to reach the customer
19. [1] (b) Retailer Advantages: Sell in large quantities of tables to retailers
20. [1] (b) Retailer Advantages: Reduced distribution costs
21. [1] (b) Retailer Advantages: Can promote the furniture - reducing marketing costs for FO
22. [1] (b) Retailer Disadvantages: No direct contact with customers of wooden furniture
23. [1] (b) Retailer Disadvantages: Price is often higher – retailer will add their mark up
24. [1] (b) Direct to customer Advantages: Lower price of furniture than if sold through other intermediaries
25. [1] (b) Direct to customer Advantages: Can use internet or mail order to sell products
26. [1] (b) Direct to customer Advantages: Have direct control over marketing
27. [1] (b) Direct to customer Advantages: Develops a direct relationship between the customer and the producer - easier to follow up with direct marketing to customer
28. [1] (b) Direct to customer Disadvantages: May have increased distribution costs for tables and chairs as selling to many customers rather than just a few with the other methods
29. [1] (b) Direct to customer Disadvantages: Higher costs of administration
30. [1] (b) Direct to customer Disadvantages: Not all customers feel confident or are able to order online
31. [1] (b) Recommendation: Direct to customer should be chosen as FO sells furniture that is not bought in large quantities by customers and a higher price can be charged. Wholesalers may not convey the sustainable features of the furniture to smaller retailers so fewer sales. Retailer may take part of the profit margin reducing the profit for FO.
32. [1] (b) Recommendation: If FO use a wholesaler or a retailer to sell its furniture FO will need to discount the price so it will make less profit from these methods of distribution.
33. [1] (b) Recommendation: Customers pay a high price for furniture if sold direct to the customer so it will allow FO to make a high profit margin on each item of furniture.