Explain two ways SSM's cash-flow problems could be overcome.

Mark scheme

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

1. [1] (a) Award 1 mark for each way (maximum 2 marks).
2. [1] (a) Award three additional marks for explaining each way cash flow problems can be overcome – one of which must be in context.
3. Relevant points might include:
4. [1] (a) Increase access to short-term source of funds - short-term bank loan / overdraft - will inject cash into the business / provide funds when there is a liquidity problem – suppliers need to be paid quickly in 20 days in 2021
5. [1] (a) Delay payment to suppliers – as it used to be 40 days and is now 20 days – cash outflow decreases – less working capital required so eases cash flow problem
6. [1] (a) To ask customers to pay promptly – instead of waiting 60 days – cash flows into the business more quickly – may have time to receive revenue from sales before payment for raw materials is necessary
7. [1] (a) Delay or cancel purchases of capital equipment – delay paying out the $15 million for expansion – reduces cash outflow in the short-term
8. [1] (a) Example of how to increase cash inflows such as increase price of product
9. [1] (a) Example of how to reduce cash outflows such as find cheaper supplier of raw materials
10. [1] (a) For example: Delay payment to suppliers (1) as this will reduce the cash outflow (1) and will reduce the amount of working capital required by SSM (1). The time taken to pay suppliers has been reducing 40 days to 20 days which seems to have been an increasing problem for SSM (app).
11. Application might include: debtors pay in 60 days – used to pay in 20 or 40 days; suppliers paid in 20 days – used to be paid in 30 or 40 days: debtors take more days to pay for soap powder; suppliers have been paid more quickly over the last two years.
12. 4(b) Level 3 [9-12] Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one change. Well-justified conclusion. Candidates discussing both changes in detail, in context and with a well-justified conclusion including why the alternative change was rejected should be rewarded with the top marks in the band.
13. 4(b) Level 2 [5-8] Sound application of knowledge and understanding of relevant business concepts using appropriate terminology. Detailed discussion of at least one change. Judgement with some justification / some evaluation of choices made. Candidates discussing at least one change in detail and applying it to the case should be rewarded with the top marks in the band.
14. 4(b) Level 1 [1-4] Limited application of knowledge and understanding of relevant business concepts. Limited ability to discuss the changes with little/no explanation. Simple judgement with limited justification / limited evaluation of choices made. Candidates outlining both changes in context should be rewarded with the top marks in the band.
15. 4(b) Level 0 [0] No creditable response.
16. Relevant points might include:
17. Increase in employment
18. • Higher incomes as more people employed – increase in sales of SSM soap powder
19. • Higher incomes appear to have resulted in a 15% increase in the sales of washing machines – resulting in a higher demand for soap powder
20. • However, wage rates may increase due to more competition in the labour market – SSM may have to increase its wage rate
21. • May be more difficult to recruit new employees – might disrupt production
22. Increase in inflation
23. • Increase in pressure to raise wage rates at SSM as cost of living increases due to 8% inflation this year for employees
24. • SSM may have increased raw material costs – raise prices to maintain gross profit margin of soap powder
25. • Inflation will cause prices to rise leading to lower sales for SSM / Customers may not be able to afford SSM products as prices have increased
26. • Foreign competitors' products may be cheaper – if inflation rates abroad are lower than the 8% inflation rate in country Y – may put pressure on SSM to lower its prices - reduce revenue
27. • However, if employees are well-motivated and now do not find their job boring then productivity may have increased - wage cost per unit may not change
28. • Inflation may cause wages generally to increase and so an increase in the price of SSM products may have little or no effect on their sales
29. • Soap powder for washing clothes can be seen as a necessity and not a luxury product – so sales will be maintained even when there is inflation as consumers still need to buy these products
30. Conclusion
31. • It depends on the extent to which the increase in employment leads to increased sales of SSM soap powder. If there is a large increase in the number of people employed, then disposable incomes will increase significantly and may lead to consumers spending a higher amount on luxury items such as washing machines and therefore soap powder – higher profit for SSM. An increase in inflation is likely to have less effect on profit as an increase in costs may be matched by an increase in prices.
32. • Whether SSM has an increase in its profit may depend on whether the products in country Y are competitive with products from other countries due to the different inflation rates. If they are, then SSM revenue from the sales of its products for washing clothes may increase possibly leading to higher profit. This will depend on whether SSM can remain competitive.