IB Business Management HL 3.7.6 Cash flow problem strategies Question Bank

It is expected that candidates make constant reference to/use of the figures and other relevant information in the stimulus combined with theoretical understanding of the advantages and disadvantages of the possible strategies.

Some of the possible strategies:
Reduce cash outflow. CM is facing cash flow crisis as seen by its deteriorating acid test ratio of 0.6 . Without stock, which contributed to a high current assets ratio, C M cannot meet its long-term liabilities. It is evident that there is a big difference between debtors and creditors days. CM paid the farmers within five days in 2018, which is very quick and got significantly quicker - twice as fast but received money from the retailers after 70 days in 2018, a significant increase from 50 days. C M is too generous to retailers with the credit term. Despite the
fact that the relationship with retailers and the suppliers is CM's competitive advantage, it is financially dangerous given the decreasing and very low acid test.

Seek alternative suppliers with cheaper agriculture produce might be seen as an extreme solution, as CM's relationship with the farmers and the quality of the organic ingredients are key to its competitive advantage. It might take a long time to find different suppliers. Perhaps agreeing a longer credit term would be a better solution. Currently, CM pays after five days. One can assume that the farmers are likely to prefer a request for a longer pay period than a more drastic one.

Cut expenses. Gross profit margin is considerably higher than net profit margin for a manufacturing company and is getting worse over time. CM should look at some unnecessary expenses like marketing or administration. However, cutting salaries or staff might impact on the employees' motivation and cutting marketing might create some difficulties in competing with the new competitors. However, going out of business due to lack of cash can be judged as a more significant threat.

Do not accept better stock control due to JIT.
Tighter credit control. Cash payments only for the retailer will clearly reduce/eliminate debtor days. The acid test ratio is worrying and CM must take immediate actions to solve this short-term liquidity problem. However, the relationship with the retailers might deteriorate and they might start buying non-organic frozen food from the emerging competitors. It appears that CM's bargaining power with the retailer is weak and this option is unlikely to be successful. One, however, may argue that increasing the creditor days is unlikely to be met with much objection from its suppliers given the very low starting figures and long-established trust. CM might also be able to ask its debtors - the retailers - to pay sooner, even after two months, a demand which is likely to be seen as reasonable.

Changing pricing policy. CM can possibly reduce the price of its products. While CM may be more competitive and this strategy may work well given the economic downturn and the increased competition, CM may suffer losses or a reduction in profit. However, customers may perceive the frozen organic meals as even better value for money and increase demand. Moreover, perhaps CM can withstand a reduction in profit in the short term and we can see that C M is profitable. The liquidity issue ought to be sorted. CM should prioritize its cash flow problem first, then deal with a low acid test to generate cash to survive.

Enhance marketing to generate more sales in cash. CM might be able to reduce its increasing level of stock and reduce stock turnover in days, which has clearly deteriorated considerably from 20 to 40 days. However, any type of promotion may incur more expenses, especially in cash. The data indicates that the net profit margin is considerably lower than the gross profit margin, which indicates that CM does not control its expenses well.

Improved product portfolio. Perhaps CM should also consider non-organic meals or other types of products to enhance its portfolio and create more revenue streams. However, cannibalism can be created - CM may also have to compete more directly with the increasing number of providers of non-organic frozen meals. Market research has to be done so perhaps this option is not the most appropriate one in the short term.

Seeking alternative short term sources of finance. Accept relevant applicable suggestions like the use of overdraft and short-term loans, to deal with CM's short-term liquidity crisis. However, these options are more of first aid rather than solution to some ongoing problems and are likely to be more theoretical given the lack of information in the stimulus.

It is not expected that the candidates cover all of the above.
Accept any other relevant arguments for and against any relevant suggested strategy.

Accept any other relevant examination.
A conclusion with judgment is expected.
A balanced response covers at least one argument for and one argument against each of two different strategies.

Marks should be allocated according to the mark bands on page 3 with further guidance below.

For one relevant issue that is one-sided, award up to [3]. For more than one relevant issue that is one-sided, award up to a maximum of [4].

Award a maximum of [6] if the answer is of a standard that shows balanced analysis and understanding throughout the response with reference to the stimulus material but there is no judgment/conclusion.

Candidates cannot reach the [7-8] markband if they give judgment/conclusions that are not based on analysis/explanation already given in their answer.

It is expected that the candidate goes beyond just providing some relevant arguments for or against any suggested strategy and finish off with some conclusions and judgment.

Award a maximum of [4] marks if the answer, regardless of balance and judgment makes no reference to either the figures or headings in Table 1

Candidates, in order to reach to the top markband, should show clear evidence of substantiation/well supported.

For the top markband, candidates must make use of the financial information given in their discussion.