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3.7 Cash flow Topic Practice

3.7 Cash flow Topic Practice
IB Business Management syllabusBusiness Management SL/HLFirst assessment 2025

Students practise preparing cash-flow forecasts, explaining differences between profit and cash flow, diagnosing working capital issues, and evaluating cash-flow impacts of…

Exam points

  • prepare a fully labelled cash-flow forecast for up to four months using case data
  • explain how a specific decision affects cash flow timing, magnitude, or sustainability

Question 1

[Maximum number: 8]

MS Cars (MSC)

Migrieve Shah owns a business, MS Cars (MSC), that sells used (second-hand) cars.
In the first four months of 2025, MSC's sales fell by 20 % compared with the same months in 2024.
On 1 May 2025, Migrieve arranged an overdraft from her bank, as a fall in sales caused liquidity problems for her business. She has forecasted the figures shown in Table 1 for MSC for the next four months of 2025 (June to September).

Table 1: Forecasted figures for MSC, June-September 2025

Table 1: Forecasted figures for MSC, June-September 2025

The majority of MSC's customers use a bank loan to finance car purchases.

Question 1(b)

(a)

Using information in Table 1, prepare a cash-flow forecast for MSC for June

September 2025.

[ 6 ]

Question 1(c)

(b)

Since making the forecast in Table 1, Migrieve has learned that interest rates are forecasted to rise in July 2025.

Comment on one possible impact on MSC's cash flow if interest rates rise, as forecasted, in July 2025.

[ 2 ]

Question 1

[Maximum number: 8]

1. Make-Up (MU)
Lana Lane is an image coach and plans to open Make-Up (MU), a shop where she can sell her own brand of beauty products. Because Lana is a female entrepreneur, her local government will pay 50 % of the rent for the space in which M U will operate.
Lana has forecasted the following figures for M U for the first six months of operation, beginning on 1 July 2023 (see Table 1). The opening balance will be $ 0.

Table 1: Figures for the first six months of operation, beginning on 1 July 2023

Table 1: Figures for the first six months of operation, beginning on 1 July 2023

Lana has learned that a new competitor with lower prices will enter the market before the end of 2023.

Question 1(b)

(a)

Using the information in Table 1, prepare a monthly cash-flow forecast for M U for the first six months of operation.

[ 6 ]

Question 1(c)

(b)

Comment on the possible impact of the new competitor on MU's cash flow.

[ 2 ]

Question 2(b)

[Maximum number: 6]

Explain strategies, in addition to redundancies, that P U could use to solve its cash-flow problems (lines 56-59).

Question 2

[Maximum number: 8]

2. Menlo Seat Covers (MSC)
Menlo Seat Covers (MSC) manufactures car seat covers. The business operates as a private limited company owned 100 % by Tony Mehta, who is also the only employee. MSC sells its products only online. The market is increasingly competitive. Tony will give himself a 16.66 % pay increase starting 1 April 2024.
Tony forecasts the following monthly cash outflows for the first four months of 2024:
- Heating and lighting: $ 3000.
- Salary: $ 6000.
- Packaging: $ 2000.
- Delivery charges: 5 % of sales revenue.
- Purchases: $ 20000.
Additional information:
- Opening balance on 1 January 2024: $ 14000.
- Sales revenue: $ 35000 each month.
- Rent of $ 4500 paid quarterly: first payment in January 2024.
- MSC will receive $ 8000 from the sale of used equipment in March 2024.
Tony would like to expand the business but, lacking sufficient internal sources of finance, must seek external sources.

Question 2(b)

(a)

Using the information above, prepare a fully labelled cash-flow forecast for MSC for the first four months of 2024.

[ 6 ]

Question 2(c)

(b)

Comment on the predicted cash flow for MSC for the first four months of 2024.

Answer two questions from this section.

[ 2 ]

Question 2(b)

[Maximum number: 6]

2. Les Légumes Contentes (LLC)
Les Légumes Contentes (LLC) is a cooperative of farmers that sells organic produce. LLC's starting capital is $ 5000. It needs a bank loan to buy refrigerators for its store. The bank has requested a cash-flow forecast. The forecasted figures are shown in Table 3.

Table 3: Forecasted figures for LLC for the first four months of operations, beginning 1 January

Table 3: Forecasted figures for LLC for the first four months of operations, beginning 1 January

Using Table 3 and the information provided above, prepare a monthly cash-flow forecast for L L C for the first four months of operations.

Question 3(c)

[Maximum number: 4]

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.

Table 3: Selected financial information for TJ on 31 May 2021 and 2022 and for the years ending 31 May 2021 and 2022

Table 3: Selected financial information for TJ on 31 May 2021 and 2022 and for the years ending 31 May 2021 and 2022

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.

Table 4: Forecasted costs of Option 1 and Option 2

Table 4: Forecasted costs of Option 1 and Option 2

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

Question 3(c)

[Maximum number: 4]

3. Davidson Studios Ltd. (DS)
Davidson Studios Ltd. (DS) is a private limited company created in 2018 and equally owned by two sisters, Emma and Laura Davidson. Both recent graduates, they design and produce fantasy board games, which are sold to local retailers.
Emma specializes in game design and Laura is the operations manager. The design of a new game takes 12 months. DS's first board game was a success and enabled DS to rent workspace and hire employees. The second game, Held Captive, was a massive commercial success.
DS had to move to larger premises and recruit more design, marketing and production staff. DS's organizational culture empowers employees to solve problems and gives them the opportunity to manage tasks. Employees also enjoy modern office spaces, generous breaks and competitive salaries. Quality circles and job rotation are common. Labour turnover is low and employee morale is high.
As production increased, however, DS ran into problems. With more employees to pay and invoices due, D S had almost run out of working capital (see Table 4).

Table 4: Selected financial ratios for DS

Table 4: Selected financial ratios for DS

Two options are being considered to avoid further liquidity problems and continue DS's rapid expansion:
- Option 1: Accept an offer from Big Game Industries (BGI), the market leader, to purchase 51 % of DS's shares. BGI would keep the DS brand and install a chief executive officer (CEO). Emma and Laura would have reduced roles in DS.
- Option 2: Accept an offer from a venture capitalist to purchase 35 % of shares. This would provide a cash injection sufficient for the next 12 months.

Explain two reasons for the working capital problems at D S.

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