Analyse the advantages and disadvantages of each method for a given…

The idea

For a given business situation, you must analyse the advantages and disadvantages of each source of finance. This means going beyond listing pros and cons: you need to develop chains of reasoning that link the source's features to consequences for the business. For example, a small business needing quick cash for stock might use an overdraft because it is flexible and fast, but the high interest rate could reduce profit. A profitable limited company expanding might issue shares to raise large sums without repayment, but the owners may lose control. Consider the business's size, legal structure, purpose (short-term vs long-term), cost, risk, and impact on cash flow and ownership. The best answer weighs up both sides and reaches a justified conclusion.

What earns the marks

• Develop arguments that explain how each advantage or disadvantage affects the business, not just state them.
• Consider the specific context: type of business, amount needed, duration, and existing financial position.
• Compare sources: e.g., a loan has fixed repayments but interest; an overdraft is flexible but expensive and repayable on demand.
• Evaluate trade-offs: e.g., share issue avoids debt but dilutes control; retained profit avoids interest but may be limited.
• Reach a justified recommendation that follows from the analysis, considering both pros and cons.
• Use business terminology accurately (e.g., 'dilution of control', 'security', 'cash flow').

Common mistakes and how to put them right

• Listing advantages and disadvantages without linking them to the specific situation.

  Put it right: Apply to the context given.

• Ignoring the disadvantages of a chosen source.

  Put it right: A balanced analysis must consider both sides.

• Failing to make a clear judgement or recommendation.

  Put it right: Analysis should lead to a conclusion.

• Confusing short-term and long-term needs.

  Put it right: e.g., using an overdraft for a long-term investment is usually inappropriate.

Exam tips

• Use connectives like 'because', 'therefore', 'however' to build chains of reasoning.
• Refer explicitly to the business in the case study (e.g., 'for a small sole trader...').
• Structure your answer: briefly outline the source, then analyse its pros and cons in context, then conclude.
• For higher marks, consider alternative sources and explain why your recommendation is better than the alternatives.