BUSS2 Exam Technique – Application is about staying in context

Over the years, the skill of application has been mentioned in examiners' reports numerous times. Too often, students write down all the theory they know, totally neglecting to set their response in the context of the case study provided. Although more recent reports indicate that students are getting the message, it is still vitally important to apply your responses properly; in the case of the evaluative questions, this will also help make sure that your judgement is relevant.

We were looking at the Jan 2011 AQA BUSS2 paper yesterday in which Q 2 (c) is a very good case in point:

Discuss whether increasing the overdraft limit is the best way for Velocity Ltd to improve its cash flow position.

The basis in knowledge and analysis might be to explain that on the plus side:

• An overdraft can be flexible, interest is only charged when in debit and it may be relatively easy to set up. It is meant to help a business manage cash flows in and out over time and should swing into credit on a regular basis.

On the negative side:

• There is interest to pay which may be expensive, there will be other fees to pay, additional security may be required, the bank may theoretically recall the debt at any time.

However, let's look for some application based on the data in the case study.

We see that Velocity Ltd has an overdraft limit of £1.5 million and has already exceeded it four times, resulting in large penalty fees. So, increasing the limit 33% (i.e. to £2 million) would avoid those fees, as long as it was sufficient for their future needs. On the other hand, the bank may be unwilling to increase the limit because they might think that the business has underlying cash flow problems and they would soon be back for another increase.

This is all well and good but the question asks whether an increased overdraft limit is the BEST way for Velocity Limited to improve its cash flow position.

What else might they do?

Well, if we look at the data, we notice that the average period of time allowed by suppliers for payment is only 12 days. A large business like Velocity should aim to get longer credit terms – perhaps 30 days; this would certainly make a big difference to the cash flow position and would have no cost to Velocity – as long as its suppliers agreed to the move and did not increase their prices.

As a former banker, though, the figure that I notice most is the outstanding debts owed by customers of £2 750 000! If this money was collected in more quickly, Velocity could solve its cash flow problems at a stroke. We see that Velocity struggles to meet demand for its cars and so it is in a strong position to take a much firmer line on credit control; why not require payment before a car is released?

Good credit control does take time and effort – phoning customers and passing difficult cases to solicitors, for example - but it seems to me that this is far and away the best way for Velocity Ltd to improve its cash flow position - all this without interest and bank charges. It would also give the bank much more confidence that the business was being properly managed.

So, in terms of application, can you see how we need to find the particular circumstances in the case study that support the answer? This is the basis of good application.