IB Business Management SL 3.7 Cash Flow Questions

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.

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 ( S F ) 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, S F 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 S F 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 S F 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 T 's manufacturing-capacity needs and sell the old factory for $\$400000$. This new factory cannot be financed solely with external borrowing.

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