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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 have several limitations that could impact their reliability:
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Normalisation of Earnings: The financial reports do not account for normalised earnings, which may include adjustments for non-recurring income or expenses, leading to a potential misrepresentation of the business's ongoing financial performance.
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Capitalisation Issues: The reports might not fully capitalise certain expenses, excluding necessary costs such as future investments, leading to an overly optimistic view of profitability.
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Valuation Methods: There is a lack of disclosure on the valuation methods used for intangible assets like goodwill, which could affect the understanding of the true asset value.
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Debt Repayment Issues: The reports do not clearly outline debt repayment schedules, which could impede the assessment of future cash flows and financial sustainability.
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Subjectivity in Estimates: Certain estimates and judgments, such as the valuation of accounts receivable, are subjective and can lead to inaccuracies in the representation of the financial position.
Step 2
recommend appropriate working capital management strategies for the business
Answer
To effectively manage working capital, Lee's Catering should consider the following strategies:
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Improve Inventory Management: Implementing just-in-time (JIT) inventory systems can reduce carrying costs and ensure that inventory is aligned closely with demand.
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Optimize Accounts Receivable: Tightening credit terms and improving collection processes can help to expedite cash inflow and reduce outstanding receivables.
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Streamline Accounts Payable: Negotiating better payment terms with suppliers can enhance cash flow by allowing the business to retain cash longer before settling debts.
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Forecast Cash Flow: Developing accurate cash flow forecasts can help anticipate future cash needs, allowing the business to make informed decisions on capital allocation.
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Regular Review of Working Capital: Continuous monitoring of the working capital ratios helps to benchmark performance and identify areas needing improvement.
Step 3
evaluate a pricing strategy the business could use
Answer
A suitable pricing strategy for Lee's Catering could be a value-based pricing strategy, which focuses on setting prices largely based on the perceived value to the customer. This approach involves several key components:
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Understanding Customer Perception: By conducting surveys or market research, the business can gain insights into how customers perceive the value of their catering services relative to competitors.
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Premium Pricing: Given the high-profile nature of the chef and the quality of food, Lee's Catering could establish a premium pricing model to reflect its high value proposition.
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Bundling Services: Offering bundled packages for events can enhance perceived value and allow for higher price points while providing customers with a sense of savings.
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Dynamic Pricing: Adjusting prices based on demand, seasonality, and event type can maximise revenue while ensuring competitiveness.
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Transparent Communication: Clearly communicating the factors that contribute to pricing (e.g., ingredient quality, chef expertise) can justify higher prices and align customer expectations.