Forms of Business (AQA AS Business): Exam Questions

Paul’s Puzzle Business

Paul retired from his full-time job in 2018 and started a small business as a sole trader. The most Paul wanted to work was two days a week. He produces wooden puzzles which are sold to two large retailers. Paul’s main aim when starting was to make an operating profit of £20 000 a year to add to his pension. Since starting, Paul has more than doubled this profit figure. He has worked more than expected but has really enjoyed it.

Trends for the puzzles change quickly. Paul can respond immediately by altering the designs produced. Paul provides the puzzles to the retailers but receives payment three months later. He makes a large gross profit margin. Paul worries about having to pay his supplier for all material costs even if puzzles do not sell. Last month, sales hit record figures and now the retailers owe Paul a large amount of money.

Paul’s supplier usually sells to him in bulk. The supplier has offered an excellent one-off half price deal on materials for orders by the end of this month. Paul is keen to take up the offer. However, he does not have enough cash available to do this. Paul’s bank manager advised him that interest rates on loans would be 6% and are rising very rapidly. Another lender said they could arrange a debt factoring agreement at 85% of any sales invoices.

Recently, Paul has been contacted by an investor, Holly. Holly has no experience in this market but is impressed with Paul’s business. She believes she can help him to expand but insists that Paul’s business would have to be turned into a private limited company. Paul would maintain a 40% share and she would own the rest. Holly would buy new machinery to help Paul make more items. Holly has promised she can increase profits by 300% but she would make all the decisions. This would allow Paul to go back to working two days a week.

Fit Gym plc

Eamon is Chief Executive of a large gym chain called Fit Gym plc. Eamon established the business in 2008, aged 30. He is passionate about people getting fit and providing a great gym experience for customers. Eamon has £45 million in personal savings.

Eamon’s personal objectives are to:

• continue to develop the premium image of Fit Gym

• work within the fitness industry for at least the next decade.

The market for gym membership is growing rapidly. Fit Gym operates premium gyms based in city centres; they are open 8 am to 6 pm every day of the week. Fit Gym’s target market is city workers, who work at offices near the gym. Its busiest hours tend to be around the start and finish of the office working day.

Fit Gym’s customers are not price sensitive but expect to have easy access to the equipment. In recent weeks, capacity has been a problem as customers have complained about growing queues to use the gym equipment at busy times. Compared to rival gyms, Fit Gym has double the level of staffing to maintain a high level of customer service. Most staff are paid by the hour; the hourly pay is high for the industry.

Fit Gym became a public limited company in 2016. It has 100 million shares issued. Eamon retained 10% ownership. The current share price is 50p.

Table 2 Data comparing Fit Gym to competitors in 2020

Eamon has consistently argued for high levels of investment in staff, premium facilities and top-quality equipment; this has led to low dividends. Most of the other shareholders now want to cut costs to improve profitability. The shareholders have asked Eamon to cut staffing levels and sell off less profitable gyms. They want Eamon to relocate many of the remaining gyms to cheaper sites. They also want increases in dividends and have threatened to replace Eamon as Chief Executive if this does not happen.

Meanwhile, a highly profitable American gym chain is considering expanding into the UK market. It has a reputation for buying out rival chains and cutting costs.