LMA is a family-owned restaurant. The business was started 20 years ago and has remained small. LMA is a partnership. The partners are considering whether LMA should become a private limited company. The Finance Manager is analysing LMA's cash-flow forecast. An extract is shown in Table 2.1. Table 2.1 Extract from LMA's cash-flow forecast 2023 ($000) | | July | August | September | |:---|:---|:---|:---| | Cash inflow | 420 | 300 | 330 | | Cash outflow | 410 | 320 | 360 | | Net cash flow | X | (20) | (30) | | Opening balance | 60 | 70 | 50 | | Closing balance | 70 | 50 | Y |

Mark scheme

Marking points from the official mark scheme (May/June 2023). The mark or mark type is shown in brackets.

1. [1] Too much inventory;
2. [1] Growing too quickly/overtrading;
3. [1] Allow customers/trade receivables too long to pay;
4. [1] Paying suppliers/trade payables too quickly;
5. [1] Seasonal /low demand;
6. [1] Poor (financial) planning.
7. [1] Other appropriate responses should also be credited.
8. [1] X = $10000 or 10;
9. [1] Y = $20 000 or 20.
10. [1] (Cash) sales/revenue;
11. [1] Payments from trade receivables/money from credit sales;
12. [1] Grants;
13. [1] Bank loan;
14. [1] Sponsorship;
15. [1] Sale of non-current assets;
16. [1] Funds from investors/share issue/capital introduced by owner;
17. [1] Dividends from shares in other companies;
18. [1] Interest received from savings/bonds/investments.
19. [1] Other appropriate responses should also be credited.
20. [1] Limited liability [k] so personal assets are not at risk if the business is not able to repay its debts/only liable for the amount invested [an];
21. [1] Separate legal identity [k] so the owners are not held responsible for the actions of the business [an] which is not true for a partnership [app];
22. [1] Able to raise finance by selling shares [k] to fund expansion [an] if the business decides it does not want to remain small [app];
23. [1] Continuity [k];
24. [1] Can choose who buys shares [k].
25. [1] More legal formalities [k] which takes time away from other activities [an] in the restaurant [app];
26. [1] Separation of ownership and control [k] so the owners may not be involved /agree with business decisions taken [an] as the directors may not listen to the family [app];
27. [1] Expensive/time consuming to change to this form of business organisation [k];
28. [1] Accounts must be made available [k];
29. [1] Dividends may/ be paid [k] reducing retained profit [an].
30. [1] Other appropriate responses should also be credited.
31. [1] Access to capital/lack of finance [k] which makes it difficult to fund expansion/working capital [an];
32. [1] Small market [k] so there is not sufficient demand [an];
33. [1] Lack of skills/knowledge to expand/larger business more difficult to manage [k] so more likely to make mistakes if expand [an];
34. [1] Lack of workers [k];
35. [1] Type of industry/service industries (offer a personal service)/specialised products [k] where close contact maybe needed [an];
36. [1] Personal objectives/owner's objectives or example such as better communication with customers, keeping control [k] which might help retain/increase customer loyalty [an];
37. [1] Market dominated/controlled by a few large competitors [k] so will struggle to attract more customers [an].
38. [1] Other appropriate responses should also be credited.
39. [k] One reason is the size of the market as there may be insufficient customers; [an] Another reason is lack of finance making it difficult to fund expansion. [k] The size of market is a more important reason why a business might remain small as without customers there is no revenue [eval], which is likely to reduce the need for finance anyway [eval].