Assessing Small Retailer Failure Due to Working Capital Management

Evaluate whether the most likely reason for the failure of a small retailer is poor management of its working capital. AO1 Knowledge and understanding · Business failure is when a business ceases operations because of inability to bring in enough revenue to cover costs. · Small businesses often have few employees, low start💥up costs but low revenue and small profits, serve a small market area, sole or partnership ownership or small private company, suffer poor working capital. · Small businesses are often high💥risk businesses, have defective business models, poor management, fail in early months. · Working capital is a measure of the liquidity/financial health of a business, the difference between the current assets (cash receivables, unpaid accounts and inventories) and current liabilities (accounts payable and debts). · Developed knowledge of reasons for failure of a small business – small businesses have limited resources, especially in relation to short term cash/working capital – they are also susceptible to slow payment of goods supplied – not enough attention is paid to managing working capital – other reasons for failure may include lack of profitability. (2 marks L2) · Limited knowledge of reasons for failure of a small business – small businesses pay insufficient attention to cash flow forecasting. (1 mark L1) AO2 Application · Application of any points which apply to a small retail business e.g. customer service, home delivery, after💥sales service, merchandising, providing credit (even if these may also apply to other businesses.) It is important that the answer does not refer specifically to production/manufacturing. · Application could refer to specific types of small retail shops. · Developed application – a poor business model may mean that a small clothes shop pays insufficient attention to managing its working capital – payment to the suppliers of clothes may be delayed or the wrong market is targeted e.g. coats sold in summer. (2 marks L2) 9609/12 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2023 © UCLES 2023 Page 24 of 32 Question Answer Marks 5(b) · Limited application – small clothes shop pays insufficient attention to cash flow forecasting e.g. different clothes sold at different times of the year. (1 mark L1) AO3 Analysis Reasons for failure of small businesses include the following: · Business model is defective — lack of market research · Management is inadequate – poor multi💥skilling – poor entrepreneurial skills · Marketing is inadequate — limited resources for effective marketing activities · Capital/funding — limited and likely inadequate to respond to market changes · Customer/fashion changes — small niche businesses have very small product portfolio · Working capital management is poor — fails to provide sufficient capital to fund current operations (payment to employees, suppliers, other fixed and variable expenses) and fund future growth. · Poor working capital management — can lead to insolvency. · Developed analysis – the working capital of a small retailer is inadequate. Late payments are made to suppliers resulting in business relationships breaking down, as suppliers lose confidence in a business. Supplies may be stopped, meaning that a business is unable to trade. (2 marks L2) · Limited analysis – the working capital of a business is inadequate as the business becomes illiquid and unable to purchase supplies. (1 mark L1) AO4 Evaluation · Eval 6 – developed judgement/conclusion is made in context (e.g. small clothes shop) (6 marks L3) · Eval 5 – developed evaluative comments given in context (e.g. small clothes shop) (5 marks L3) · Eval 4 – developed judgement/conclusion is made, not in the context of a small retailer. (4 marks L2) · Eval 3 – developed evaluative comments made, not in the context of a small retailer. (3 marks L2) · Eval 2 – judgement/conclusion is made but with little supporting evidence, again not in context. (2 marks L1) · Eval 1 – an attempt is made to balance arguments. (1 marks L1) · Eval 0 – no evaluation is attempted (0 marks) 9609/12 Cambridge International AS & A Level – Mark Scheme PUBLISHED May/June 2023 © UCLES 2023 Page 25 of 32 Question Answer Marks 5(b) · A judgement/decision is made as to whether poor management of working capital is the most likely reason for business failure. · Such judgements/decisions may be made at any point in the essay, not just in a concluding section. · Judgement is made that running out of cash due to poor working capital management is likely to be the prime reason for business failure for a small retailer – a disconnect between revenue generated and funds needed – lack of attention to managing cash is critical. · Judgement is made that there may well be other reasons for the failure of a small retailer, such as inexperience, poor management team, flawed business model, overall lack of funding and unsuccessful marketing – not as significant as poor working capital management. · Judgement is made that for a small retailer it may depend on the types of products sold by the retailer – if it is a clothing retailer and the clothes are luxury/designer items, then there may well be severe pressures on working capital – the location, décor of the shop, and the necessity to hold stock in different sizes may mean high costs and competition may be intense.