IB Business Management SL 3.7.3 Liquidity position Question Bank
Practise IB Business Management SL 3.7.3 by explaining cash flow and why managers monitor liquidity in a business.
- Syllabus
- First assessment 2024
- Course
- Business management SL
- Level
- SL
Exam points
- Explain liquidity as the ability to meet short-term obligations using available cash and current assets.
- Describe how cash-flow monitoring can reveal causes and risks of a liquidity problem.
3.7.3—Liquidity position question 1
[Maximum number: 4]
The Imperial had early problems with cash flow and liquidity management and later faced seasonal working-capital pressure and difficulty following its monthly budget. Monitoring cash flow helps Martin forecast cash inflows and outflows, avoid shortages and plan payments. The restaurant, hotel and special-events services were separate profit centres, while housekeeping was a cost centre. Global Properties required profit and loss accounts and balance sheets for financial accountability. Craig Chapman operated an orphanage near Nairobi and continued to work for non-profit organizations; non-profit objectives can include providing a social service, improving beneficiaries’ welfare and meeting humanitarian needs rather than maximizing profit. External changes affecting operations include political unrest, tourism growth, competition from newer hotels, seasonal demand, airport access, technology such as fast WiFi and changing customer interest in safaris and cultural tourism.
Describe the importance of monitoring the cash flow at The Imperial.
Cash flow is the movement of money in and out of a business. It can refer to actual cash flows or forecast cash flows.
Monitoring cash flow is important to avoid cash shortages which could lead to liquidity problems, ie a situation where the business does not have enough money to pay its bills and debtors. It is also useful in managing expenditure, planning and decision making.
In the case of The Imperial, cash inflow mainly comes from the hotel operations (rooms), as well as other services (restaurant, special events); Martin calls them "profit centres" (line 67). Cash outflow will include all expenditure (staff wages, energy bills, maintenance etc).
Cash-flow problems can happen at The Imperial in the short term because of the seasonality of hotel operations: in some months of the year, The Imperial has fewer customers (so less cash inflow) but still has substantial cash outflow - this imbalance is the reason why Martin needs to "implement strategies for dealing with those liquidity problems" (line 66).
Accept any other relevant description.
Award [1-2 marks] for a limited answer that conveys partial knowledge and understanding. Such an answer is likely to define cash flow [1 mark], and make reference to the factors influencing cash flow [1 mark], but without considering the importance of monitoring the cash flow.
Award [3-4 marks] for a full, clear description that conveys knowledge and understanding of the importance of monitoring cash flow at The Imperial. For [4 marks] the answer will refer precisely to the case study.
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