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Sue is a sole trader whose business is growing rapidly as sales are increasing - HSC - SSCE Business Studies - Question 21 - 2016 - Paper 1
Question 21
Sue is a sole trader whose business is growing rapidly as sales are increasing. As a result of the growth, she needs to purchase stock worth $10,000. (a) Explain a ... show full transcript
Worked Solution & Example Answer:Sue is a sole trader whose business is growing rapidly as sales are increasing - HSC - SSCE Business Studies - Question 21 - 2016 - Paper 1
Step 1
Explain a potential conflict between a short-term and a long-term financial objective for Sue.
Answer
A potential conflict between short-term and long-term financial objectives for Sue can arise due to her need to balance immediate liquidity with future profitability. In the short-term, purchasing stock worth $10,000 may reduce her cash reserves, impacting her ability to cover immediate expenses and liabilities. On the other hand, Sue's long-term objective may be to maximize profits through increased sales volume, which requires sufficient stock. Therefore, her short-term goal of maintaining liquidity could conflict with the long-term goal of maximizing profits.
Step 2
Discuss ONE internal and ONE external source of finance for Sue’s purchase of stock.
Answer
For Sue’s purchase of stock, an internal source of finance could be retained earnings. By utilizing retained profits, she avoids additional costs associated with loans, but this approach limits funds available for other operational expenses.
An external source of finance might be obtaining a business loan. This provides immediate cash flow for the stock purchase, but it comes with interest obligations and repayment risks. Choosing either source involves weighing the benefits against the potential drawbacks for her business operations.