teacher's resource

1. Teaching Pack – AO2 Application
Financial information and decisions
Cambridge IGCSETM
Business 0450
Version 1

2. AO2 Application
• In the exam, you are often provided with some information about the business
the question is focussed on. For example, you might be told the type of
business, its future plans, how many employees there are etc.
• To ensure you are applying your business knowledge, you will need to focus
your answer on the specific business mentioned in the question.
• This means your answer will be in ‘context’.
• You will need to use the information given, when answering questions to help
demonstrate that you are applying you knowledge.

3. AO2 Application: an example
• Geoff and Margaret own a tearoom in their local town, serving the local
community and surrounding areas, with a range of teas, cakes and sweet
pastries from around the world. Margaret makes some of the sweet pastries
and cakes herself, but she also buys in some from local suppliers. They rent a
property on the high street, which they have to pay the contents insurance for
themselves.
• They have a number of cash in flows and a number of cash out flows. If you
were asked to give an example of a cash inflow and cash outflow for Geoff
and Margaret’s business, you would need to ensure that your answer is in the
context of their business i.e. use examples specific to their business.

4. AO2 Application: an example
• If you just say sales and stock, you are showing you have the knowledge, but
you are not showing you have applied it in the context of Geoff and Margaret
• If you say:
• the cash received from selling cakes, pastries and teas
• the stocks of teas, pastries and cakes bought in from suppliers
• the stocks of ingredients used by Margaret to make cakes and sweet
pastries; the examples would be applied in context, as they are specific to
Geoff and Margaret’s tearoom.

5. AO2 Application: an example
• Businesses need finance for a variety of reasons:
• start-up capital to set up the business
• working capital to pay for the day to day running expenses of the business
• to expand the business and pay for research into new products and services
• for capital expenditure to buy machinery and buildings.
• Geoff and Margaret are doing really well and have now decided to set up a
mobile tearoom, as a separate business. They will be taking their new service to
big outdoor shows such as festivals, concerts and garden shows. They will use
the tearoom on the high street to make what they take with them. They need
help identifying their start-up capital and working capital as they have never
gone ‘mobile’ before’.

6. AO2 Application: Mobile tearoom
Items start-up capital is
needed for
Items working capital is
needed for

7. AO2 Application: example summary
• Application is about using the information about the business and the nature of
its business activities, when answering questions. Application is not just stating
the name of the business.
• You need to think about the business’s activities (what their business is and
does) and put that business context into your answer.
• Think about the two examples used regarding Geoff and Margaret

8. Task 1
• On Worksheet A there are four statements that have come from a business
regarding financial information and decisions.
• You need to read each one and then decide if they are applied in the context of
the business.
• Make sure you explain your answers.

9. Task 2: Building an answer
• You will need to use Worksheet B to help build your answer to the question
below. We will work through it step by step.
Jemma wants to open up a fused glass (this involves heating, in a kiln, two or
more pieces of glass until they fuse together into a single piece) studio now
she has finished college. She has found a small studio / shop she could rent
in a seaside town about 10 miles from where she lives. In order to set up her
business she will need a kiln, glass cutting tools, vacuum cleaner, cutting mat,
paints as well as some other smaller items of equipment and furniture for the
studio. She has some savings, but thinks she will need some additional
finance to help get her set up. She is considering one of the following; taking
out a bank overdraft, leasing space in a kiln or taking out a bank loan.

10. Task 2: Step 1 – identify what the question is asking
The question is about discussing all three methods for Jemma and then
choosing one.
The key thing here is to discuss them in the context of Jemma’s business
and then decide on the most appropriate one for what she is trying to
achieve.
Question:
Discuss the three sources of finance Jemma has identified as additional
finance to help her set up, and decide which you think would be best for
her business.

11. Task 2: Step 2 – the context of the business
Think back to earlier in the lesson when we discussed context and what it means.
This is about discussing the three sources of finance in the context of Jemma’s
business weighing up the benefits and limitations of each one as a source of
finance to help her purchase what she needs to start trading. You will then need
to decide, based on your discussion, which one is the most suitable and
appropriate for that type of business and it being a start-up business.
Question:
Discuss the three sources of finance Jemma has identified as additional
finance to help her set up, and decide which you think would be best for
her business.
.

12. Task 2: Step 3 – the content of your answer
You will need to show you understand what the three sources of finance are before
you start discussing the benefits and limitations of each source in the context of
Jemma’s business and what she needs the additional finance for. This
demonstrates the knowledge you have, but it doesn’t become applied until you relate
it to the case study i.e. Jemma’s scenario in this case. Think about how each source
will help Jemma’s business.
For example, if Jemma took out a bank loan she could purchase the kiln, her cutting
tools and the other equipment and furniture she needs. Once she has purchased
these she wouldn’t have to buy them again so once the loan has been paid she
wouldn’t need to borrow any more. However, she will have to pay interest on the
loan so the borrowing overall would be more expensive than the original capital and
she would have to commit to those repayments until the loan is cleared.

13. Task 2: Step 3 – the content of your answer
She could consider an overdraft, as this can be a cheaper option than a bank loan. It
could be that she has enough with her savings to get the basics and then the
revenue she gets from selling and delivering workshops may be enough to keep her
going through high season. She would then only need use it during the winter
months. However, if she needs more finance than the overdraft will give her, for
capital expenditure, such as a kiln, this will not be enough and therefore not suitable.
Initially, Jemma could consider hiring some space in a kiln. This would reduce her
initial start up costs as she wouldn’t need to invest in buying one herself to start with.
This could work, but it is reliant on one being available to rent near to where her
studio is, and any workshop items made would mean customers would have to come
back to collect their piece, which would be difficult for day visitors. Jemma would
have to spend money posting them. This could work though if she is just selling her
pieces.

14. Task 2: Step 3 – the content of your answer
Jemma needs to see how much start up capital she needs. This will help her decide
whether she has enough for the initial outlay of equipment and machinery she
needs, enabling her to use an overdraft as and when she needs it, this being a
cheaper option.
However, if she doesn’t have enough, then it would be advisable to take out a bank
loan. Once she has paid it off, it is gone and she won’t have to pay for the
equipment again. If she is pursuing both elements of the business; selling her own
glass fused products and running workshops for customers visiting the seaside,
leasing a kiln would not be suitable, even though it could be a cost effective solution
in the first year.

15. Task 2: Step 4 – writing your answer
Now use the notes you have made on Worksheet B to write your own
answer to this question.
Remember to make lots of references to the nature of the business, to
show your answer is in context.
Question:
Discuss the three sources of finance Jemma has identified as additional
finance to help her set up, and decide which you think would be best for
her business.

16. Plenary
• Be prepared to share your answer with the class.
• You will receive feedback on your answer which you should use to make
corrections and improve your work.
• In our next lesson you will be developing your skills of application further.

17. Task 2: Step 4 – your answer might look like this
If Jemma took out a bank loan she could purchase the kiln, her
cutting tools and the other equipment and furniture she needs. Once
she has purchased these she wouldn’t have to buy them again so once
the loan has been paid she wouldn’t need to borrow any more.
However, she will have to pay interest on the loan so the borrowing
overall would be more expensive than the original capital and she
would have to commit to those repayments until the loan is cleared.
Question:
Discuss the three sources of finance Jemma has identified as additional
finance to help her set up, and decide which you think would be best for
her business.

18. Task 2: Step 4 – your answer might look like this
She could also consider asking the bank for an overdraft. This can be
a cheaper option than a bank loan and she would only use it when
she needs to. It could be that she has enough with her savings to get
the basics and then the revenue she gets from selling her glass ware
and delivering workshops is enough to keep her going through the
high season, and then she only needs to use it during the winter
months if she needs to purchase anything. However, if she needs
more finance than the overdraft will give her, for capital expenditure,
such as the kiln, this will not be enough and therefore not suitable.

19. Task 2: Step 4 – your answer might look like this
Initially, Jemma could consider hiring some space in a kiln, if there is
a glassmaker close by. This would reduce her initial start-up costs as
she wouldn’t need to invest in buying one herself to start with. This
could work, but it is reliant on one being available to rent near to
where her studio is, and any workshop items made would mean
customers would have to come back the following day to collect their
piece, which would be difficult for day trippers, and then Jemma
would end up spending money on posting them. This could work
though if it is just her selling her pieces.

20. Task 2: Step 4 – your answer might look like this
Jemma needs to see how much start-up capital she needs. This will
help her decide whether she has enough for the initial outlay of
equipment and machinery she needs, enabling her to use an overdraft
as and when she needs it, this being a cheaper option.
However, if she doesn’t have enough, then it would be advisable to
take out a bank loan. Once she has paid it off, it is gone and she
won’t have to pay for the equipment again. If she is pursuing both
elements of the business; selling her own glass fused products and
running workshops for customers visiting the seaside, leasing a kiln
would not be suitable, even though it could be a cost effective solution
in the first year.