IB Business Management SL 3.7 Cash Flow Questions

Wong Corporation (WC)


Wong Corporation (WC) manufactures clothes dryers. WC pays tax at a rate of 20 %. WC has a hierarchical organization structure. Table 3 shows selected forecasted financial information for the company for 2022, and Table 4 shows its annual cash flow forecast for 2022.

AXL
AXL has two factories, in which it manufactures aluminium cans for the soft drinks industry. AXL has a maximum production capacity of 80 million cans per year.

AXL plans to close its two factories and move production to a new, larger factory to obtain economies of scale.

In the first six months of 2022, increased competition led to a fall in AXL's sales. For the final two months of 2022, AXL plans to increase the trade credit period it offers to customers from 30 to 60 days.

Explain the potential impact on A X L if it implements its planned increase in trade credit period.

The 1950s were a turbulent time in Kenya. Following the Second World War, independence movements emerged throughout the British Empire. Fearing that the situation would turn violent, in 1959 Roger’s son and heir Jeff Williams, decided to sell all the family properties in Kenya, including The Imperial. In the decades that followed, The Imperial was bought and sold several times: between 1959 and 1989, The Imperial had five different owners. Investors were often interested in the hotel, as it was an attractive 200-room property with a private beach and easy access to Mombasa airport. However, because of recurring political unrest in neighbouring countries, the owners feared the situation in Kenya would deteriorate. They often panicked when the political situation seemed to worsen and sold the hotel.

Though the country experienced some post-election violence in 2008, it was generally safe and stable.

When appointed manager, Martin had to address a long-term problem: the fact that over the years, the competitive position of The Imperial as Mombasa’s premier seaside hotel had slowly deteriorated. New luxurious hotels were opening in the vicinity; with their spas, themed restaurants and fast WiFi Internet access, they offered better facilities and better services than The Imperial. They had a modern, high-tech feel; in comparison, the colonial charm of The Imperial looked old-fashioned. Its market share was shrinking. Because GP’s interest in The Imperial was solely for profits, Martin was only given a limited budget each year for improvements and renovation. The long-term trend for The Imperial was worrying: there was a steady decline in room bookings, at a time when ironically tourism in Kenya was doing rather well. The number of tourists travelling to Kenya was increasing annually, and other hotels were experiencing a general trend of increasing, not decreasing, occupancy rates (Appendix 1). Martin read statistics from the Kenya National Bureau of Statistics and other sources of secondary market data. He conducted a marketing audit, constructed a position map and realized that The Imperial could attract new types of traveller interested in safaris or in cultural tourism.

Besides his long-term marketing challenges, Martin had found that managing the working capital sometimes proved difficult in the short term, especially because of the seasonality of hotel operations. The Imperial occasionally had problems to follow its month-by-month budget. Now that he was manager, and not just Head of Reception, Martin had to design and implement strategies for dealing with those liquidity problems.

Martin also had a problem of human resources: how to improve his working relationship with Susan Chapman, the Head of Housekeeping. Susan’s grandfather, Craig Chapman, had travelled to Kenya from Liverpool (UK) in the early 20th century to open and operate an orphanage near Nairobi. Unlike Roger Williams, who was already wealthy before he left England and went to Kenya to make even more money, Craig Chapman had a humanitarian motivation. When Kenya became independent, Craig stayed and continued to work for other non-profit organizations.

Describe the importance of monitoring the cash flow at The Imperial.

Wong Corporation (WC)


Wong Corporation (WC) manufactures clothes dryers. WC pays tax at a rate of 20 %. WC has a hierarchical organization structure. Table 3 shows selected forecasted financial information for the company for 2022, and Table 4 shows its annual cash flow forecast for 2022.

Explain the difference between WC's profit and its cash flow.

Suparman Fish ( SF )
Gepa Suparman owns and operates four fishing boats in Indonesia. There is a growing demand for canned (tinned) food, including cans of fish. Gepa wants to enter the secondary sector by opening a small factory producing cans of fish.
Gepa's business will be called Suparman Fish ( SF ) and will be a private limited company. Gepa will own all of the shares. The factory will be located in a village three miles from the harbour. Because unemployment is high in the village, Gepa should easily find workers for the new factory. In addition to the manager's salary, workers' wages, and the cost of fish, supplies, and cans, SF will have the semi-variable cost of electricity.
Gepa has prepared a four-month cash-flow forecast based on the following information:
- opening balance month 1: $\$15000$.
- month 1 : sales revenue of $\$1000,$increasing by 20 % per month.
- manager's salary: $\$300$per month.
- workers' wages: $\$175$per worker per month.

- variable costs (fish, supplies, and cans) are equal to 40 % of sales revenue.
- semi-variable cost of electricity: fixed cost of $\$100$per month, plus a variable cost of $\$0.10$ per kilowatt hour (kwh). Month 1 usage: 100 kwh , increasing by 10 % each month.

Although SF would create several jobs in the village, many residents are not happy about the new factory. The new factory would use chemicals, which cause pollution. Residents are concerned about the unpleasant smells from the factory. A representative from the local employment office is concerned whether Gepa's factory will provide a safe working environment.

Prepare a monthly cash-flow forecast for SF for the first four months of operation.

Tijeras (TJ)

Tijeras (TJ), a private limited company, manufactures surgical scissors. It has four shareholders and operates one factory in Peru. TJ sells in Central American and South American markets. Its sales have grown for the last 10 years, which has led to both economies of scale and diseconomies of scale.

The chief operating officer (COO) analysed the situation. He discovered that:
- current work areas are overcrowded
- workers are specializing more than in previous years
- maintenance costs are increasing
- the firm now buys raw materials in bulk.

The market for surgical equipment, including scissors, in the United States (US) is large and highly competitive. Recently, some hospitals in the US purchased TJ's scissors.

The COO determined that TJ needed more manufacturing capacity and put forward two options:
- Option 1: Keep the current factory in Peru and build a second one in Mexico, closer to the North American market. TJ's bank has agreed to provide a long-term loan to finance the new factory.
- Option 2: Build a new factory that is large enough for all of TJ's manufacturing-capacity needs and sell the old factory for $\$400000$. This new factory cannot be financed solely with external borrowing.

With reference to TJ, explain the relationship between investment, profit and cash flow.

Grunsburg Textiles (GT)


Grunsburg Textiles (GT) is a textile company founded by the paternalistic leader Henrik Steiner. As the company grew, it became very committed to corporate social responsibility (CSR). "Our aims," GT says on its website, "include making profits, providing safe and secure employment, contributing to society through investment in environmentally friendly production practices and supporting ethical causes". Many people believe that GT's success is tied to its reputation for taking care of its employees and for its commitment to CSR.
In 2015, GT purchased €44 million in new environmentally friendly equipment. It financed the purchase with a bank loan. GT originally forecasted that the new equipment would generate €8 million in annual net cash flow. Instead, the actual increase in GT's annual net cash flow from the new equipment was only € 6 million. The Chief Financial Officer (CFO), Elaine, warned Henrik that unless net cash flow increased significantly, the average rate of return (ARR) would be significantly lower than originally forecasted.
GT is struggling to make the loan payments and to have sufficient working capital. Elaine determined that one way to shorten the working capital cycle is debt factoring. However, when she approached several (debt) factors, she was discouraged by their proposed discount rates.
Elaine knows that the situation is worse than she had warned. If the economy were to weaken and revenue to decline, she believes that the company could go out of business. Proposals for a solution include cutting back on GT's commitment to its employees and CSR practices.

With reference to GT, explain one advantage and one disadvantage of debt factoring.