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The table shows data for Lee’s Catering, a small business - HSC - SSCE Business Studies - Question 26 - 2016 - Paper 1
Question 26
The table shows data for Lee’s Catering, a small business. It has a high profile chef and the food is of excellent quality. It has many bookings for future events. ... show full transcript
Worked Solution & Example Answer:The table shows data for Lee’s Catering, a small business - HSC - SSCE Business Studies - Question 26 - 2016 - Paper 1
Step 1
Explain possible limitations of the financial reports
Answer
The financial reports for Lee’s Catering may have several limitations that could affect their reliability:
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Normalised Earnings: Financial reports may not consider normalised earnings, leading to misinterpretation of profitability. Adjustments for extraordinary items can make the financial health appear better than it actually is.
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Valuation Issues: Assets and liabilities are often assigned book values, which may not reflect their true market value, particularly for items like goodwill.
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Debt Repayments: Financial statements do not always capture upcoming debt repayments adequately, which can lead to liquidity issues being overlooked.
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Incompleteness of Data: Financial records may not include all financial transactions or may omit significant details, creating an incomplete picture of the business's financial position.
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Subjectivity: There are subjective estimates in accounting, such as depreciation methods or provision for bad debts, which can vary widely and affect comparability with industry standards.
Step 2
Recommend appropriate working capital management strategies for the business
Answer
Effective working capital management is crucial for maintaining the financial health of Lee’s Catering. Recommended strategies include:
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Control of Current Assets: Management should implement strict controls over cash, accounts receivable, and inventory levels to ensure sufficient liquidity. Regularly reviewing accounts receivable helps in determining overdue payments.
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Forecasting: Utilize cash flow forecasting tools to predict future cash requirements. This will help in preparing for potential financial shortfalls and ensure that the business can meet its obligations.
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Inventory Management: Adopt Just-In-Time (JIT) inventory management to minimize holding costs and reduce excess inventory, ensuring fresh ingredients are always available without overstocking.
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Supplier Negotiations: Engage with suppliers to establish favorable credit terms, which could extend payment times and improve cash flow.
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Capital Structure Review: Reassess the capital structure of the business, focusing on reducing costs associated with high-interest debt to enhance working capital availability.
Step 3
Evaluate a pricing strategy the business could use
Answer
For Lee’s Catering, a suitable pricing strategy could be:
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Value-Based Pricing: Set prices based on the perceived value of the service to customers instead of lower costs, emphasising the high quality of the food and the reputation of the chef.
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Skimming Strategy: Implement a penetration and skimming strategy, starting with higher prices to cover initial costs and to position the brand as premium, gradually lowering prices to reach broader audiences over time.
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Loss Leaders: Use loss leaders by offering certain popular menu items at a lower price to attract customers, encouraging them to try other higher-margin services and products.
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Tiered Pricing: Create tiered pricing options for different levels of service or events (e.g., basic, premium, luxury packages) to cater to various customer segments.
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Discounts for Early Bookings: Offer discounts for clients who book in advance to encourage cash flow and facilitate bookings during slower periods.