IB Business Management HL 3.7 Cash flow Question Bank

1. Las Migas
Carolina plans to set up a bakery, Las Migas, in a small town. Competition from established bakeries is strong. Carolina has asked for a bank loan because her personal savings are insufficient. The bank manager requested the following information:
- a business plan
- a cash flow forecast for the first four months of operations.
Carolina has no experience with financial forecasts but she estimated the figures for Las Migas for the first four months of operations. These figures are shown in Table 1.

1. Creative Toys (CT)
Creative Toys (CT) manufactures toys and markets them business-to-customers (B2C) online only. The business operates in a leased industrial site and relies on word-of-mouth promotion only. To make customers believe that CTs toys are better than its competitors, CT sets prices slightly higher than the competition. Production and sales are mostly between 1 October and 24 December. Most of the employees work on temporary contracts during this busy period. For the remainder of the year, CT operates well below capacity utilization.
Table 1 contains selected data for CT, for 2014:

In 2014, the management of CT considered a change of the marketing mix to include above the line promotion, lower prices, and an additional sales method called "toy parties". Toy parties would be hosted by newly recruited CT sales representatives and attended by parents and their children. At the parties parents could see the toys and children could play with them. Sales would be made at the parties by the new sales representatives, who would be paid on a commission-only basis.

Toy parties could be held throughout the year and make CTs total sales less seasonal. Based on market research, management has estimated that the parents' demand for toys is price elastic and is planning to set lower prices for all toys sold online and at toy parties. The management has prepared forecasted financial data for CT, for 2015, based upon the proposed change to the marketing mix, shown in Table 2 below.

The Finance Manager will carry out a variance analysis in order to determine whether the proposed change to the marketing mix has been successful.

2. Tasty Cupcake (TC)
Luis and José have set up a partnership, baking and selling cupcakes directly to consumers and supermarkets. They called the business Tasty Cupcake (TC). They used their savings of $ 3000 as starting capital. The partners need an overdraft agreement from the local bank. The bank manager asked for a cash-flow forecast.
Luis has forecasted the following sales and cost figures for the first six months of operation, beginning in January.
Sales
- Average selling price of one cupcake: $ 5.
- Sales of cupcakes: 1300 cupcakes in January and 1700 cupcakes per month from February
- 70 % of customers who purchase cupcakes will pay in cash. The supermarkets will buy the remaining 30 % of cupcakes on credit and pay one month later.
Costs
- Rent: $ 6500, payable at the start of each quarter.
- Labour costs: $750 per month.
- Raw materials: 50 % of sales revenue per month, paid in cash.
- Overheads: $400 per month, paid in cash.

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.

2. Café Lucchini (CL)
Fabi Lucchini will open the only café, selling hot and cold drinks only, in her small village. The economy is weak so the local government will pay 50 % of the rent for the premises in which C L will operate.
Fabi has forecasted the following figures for the first six months of operation, beginning on 1 July 2016:

An option is to install cooking facilities and serve meals to increase CL's sales revenue. Fabi estimates that she could sell 40 meals per day at an average variable cost of $ 5 and at an average sales price of $ 10. Serving meals would increase her fixed costs by $ 3000 per month.

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.

3. Cool Meals (CM)
Cool Meals (CM) produces frozen organic ready-made meals that are sold to food retailers throughout the country.
CM buys large quantities of organic ingredients from local farmers for its just-in-case (JIC) stock control management. It uses a cost-plus (mark-up) pricing strategy.
CM is known for its:
- good-quality organic frozen meals, which are perceived as good value for money
- flexibility with retailers in terms of quantity of meals supplied, credit given and efficient delivery at pre-arranged dates
- corporate social responsibility (CSR) based on a long-term commitment made to farmers to purchase large quantities of organic ingredients every four months and pay a fair price promptly
- CM has an excellent working relationship with farmers, who always prioritize CM's requests in terms of quantity and delivery.
Recently, an economic downturn and increased competition, especially from non-organic frozen meal suppliers, has decreased demand for frozen organic meals.
The finance manager of CM, Kayleigh, provided the following financial information.

Kayleigh is worried about the cash flow of CM and suggested the company changes the stock control method from just-in-case (JIC) to just-in-time (JIT). She is also looking at other strategies to improve CM's financial position.

2. Bip Bip (BB)
Nicolás and Loura want to start up a vehicle rental business in Punta del Este, a seaside resort in the Southern Hemisphere. The business will operate as a partnership and be called Bip Bip (BB). Tourist numbers are very high during the summer (December to February months in the Southern Hemisphere); the beach and water sports attract many tourists. B B will rent out convertible cars, electric cars and minivans. BB will purchase these vehicles through a leasing scheme.
"Because most rental income will occur in a few months of the year, we must forecast our cash position during the slow months and we must follow a budget," says Loura. She has forecasted the following figures for the first six months of operation, beginning in December 2015. All revenues received and costs paid will be in cash. All cash sales are paid at the time of the vehicle rental.

Due to the increasing importance of e-commerce, B B would like to offer an online booking service in addition to their website. Nicolás believes that an online booking service will allow B B to reach a wider national and international market, and will also reduce marketing costs. However, Loura argued that e-commerce also has some limitations.

After further discussion, Nicolás and Loura decided not to set up an online booking service. However, after May 2016, they will examine the budget and variances with care to determine if B B should offer an online booking service the following year.