Photo AI
Discuss the benefits to GSA of using retained profit to fund the development of new products. - Edexcel - GCSE Business - Question 9 - 2017 - Paper 1
Question 9
Discuss the benefits to GSA of using retained profit to fund the development of new products.
Worked Solution & Example Answer:Discuss the benefits to GSA of using retained profit to fund the development of new products. - Edexcel - GCSE Business - Question 9 - 2017 - Paper 1
Step 1
Why using retained profit to fund the development of new products is advantageous?
Answer
-
Cost-Effectiveness: Utilizing retained profit can be cheaper than relying on external financing sources such as bank loans, which often come with interest and fees.
-
Faster Access to Funds: Retained profits provide quick access to funds compared to the lengthy procedures involved when applying for loans or other sources of financing.
-
Independence from Debt: By using retained profits, GSA avoids increasing its debt levels, thus maintaining financial stability and lessening the burden of repayments in case of cash flow issues.
-
Control Over Investments: GSA maintains greater control over how retained profits are invested, ensuring that the funds are used for projects that are aligned with its strategic goals.
-
Reduced Risk: Other sources of finance may require collateral, which could create risk if the company is unable to meet their obligations. Retained profit eliminates this risk.
-
Long-term Financial Health: Retained earnings are crucial for sustaining long-term growth and reducing dependence on fluctuating external funding sources.
Step 2
What are possible consequences of relying purely on retained profits?
Answer
-
Limited Growth Opportunities: Excessive reliance on retained profits might inhibit the company from pursuing larger-scale projects if the retained profits are not sufficient.
-
Opportunity Cost: Funds tied up in retained earnings could have been used elsewhere to maximize returns, leading to potential losses in missed investments.
-
Shareholder Expectations: Shareholders may prefer dividends; prioritizing retained profits might lead to dissatisfaction if shareholders feel they aren’t receiving appropriate returns.
-
Financial Imbalance: An overemphasis on internal funding might lead GSA to overlook potentially beneficial external financing that could enhance growth.