Cash Flow [185 marks]

1a. [2 marks]
MiniVS (MV)
MiniVS (MV) imports light bulbs, which it sells business to business (B2B) to customers in
the UK. In 2020, MV ran into cash-flow problems and had to use debt factoring.
MV has now solved its cash-flow problems. It operates a cost-plus (mark-up) pricing
strategy and places a 100 % mark-up on the light bulbs that it purchases from suppliers.
The forecasted opening cash balance for January 2021 is £20 000.
Table 1: Forecasted data per month for MV for the first six months of 2021 (all
figures in £)

The finance director is concerned that the online market for light bulbs in the UK is
becoming increasingly price competitive. She believes that if suppliers raise prices in the
second half of 2021, MV will have to abandon its cost-plus (mark-up) pricing strategy to be
price competitive.
State two features of debt factoring.
1b. [6 marks]
Using the information in Table 1, construct a fully labelled cash flow forecast for MV for the
first six months of 2021.
1c. [2 marks]
Explain the potential impact on MV’s gross profit margin if the prices charged by its
suppliers increase in the second half of 2021.
2a. [2 marks]
Dan, a young entrepreneur, is planning to start his own small business making hand-made
wooden garden benches – Beautiful Benches (BB).
Table 2: Forecasted sales revenue for BB for the first four months
of operation, starting 1 January 2021 (all figures in $)

To be competitive, BB offers its customers credit. They pay 50 % when they buy a bench
and 50 % one month later.

Table 3: Selected forecasted financial information for BB for 2021

(all figures in $ and per month unless stated otherwise)

Dan was advised to pay close attention to BB’s working capital cycle.
Define the term working capital cycle.
2b. [6 marks]
Prepare a monthly cash flow forecast for BB for the first four months of operation.
2c. [2 marks]
Explain one strategy that BB could use to significantly improve its forecasted cash flow for
January 2021.
3a. [2 marks]
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.
Table 1: Selected financial information for CM
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.
Define the term corporate social responsibility (CSR).
3b. [4 marks]
Explain one advantage and one disadvantage for CM of using a cost-plus (mark-up) pricing
strategy.
3c. [4 marks]
Explain one advantage and one disadvantage for CM of changing its stock control method
from just-in-case (JIC) to just-in-time (JIT).
3d. [10 marks]
Using the financial information in Table 1, evaluate two strategies that CM could use to
improve its financial position other than changing to a just-in-time (JIT) stock control
method.
4a. [2 marks]
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.
Table 1: Estimated figures for Las Migas for the first four months of operations

[Source: © International Baccalaureate Organization 2019]

State two elements, other than a cash flow forecast, of a business plan.
4b. [6 marks]
Prepare a cash flow forecast for Las Migas for the first four months of operations.
4c. [2 marks]
Explain one problem that Las Migas may experience as a new business.
5a. [2 marks]
Piper Industrial (PI)
Piper Industrial (PI) manufactures pipe. The company is highly profitable and its corporate
tax rate is 20 %. PI is forecasting major capital expenditure for 2019.

Table 1: Selected forecast financial information for the year ending 31 December
2019
Table 2: Annual cash flow forecast for the year ending 31 December 2019
Define the term capital expenditure.
5b. [4 marks]
(b) Using Table 1, calculate for PI:
(i) gross profit (X);
(ii) tax (Y).

(c) Using Table 1 and your calculations in (i) and (ii), construct a profit and loss account
for PI.
5c. [2 marks]
Using Table 2, calculate the net cash flow (Z) for PI for 2019 (show all your working).
5d. [2 marks]
Explain the difference between profit and cash flow.
6a. [4 marks]
Refer to Afghan Sun case study SL/HL P1 May and Nov 2018.
With reference to Table 2, describe two advantages for Su of using a cash-flow forecast.
6b. [6 marks]
Refer to Afghan Sun case study SL/HL P1 May and Nov 2018
With reference to Su and her managers at HH and AS, explain the differences between
leadership and management.
7a. [2 marks]
Some teachers have complained that Mrs K is too strict and treats them like students. These
teachers want more freedom in choosing what to do in their lessons. However, other
teachers like the certainty and clear instructions they receive at the weekly staff meetings
and appreciate that Mrs K takes a close interest in everything they do. Mrs K makes all the
day-to-day decisions at the school, and sometimes would like more guidance from Jacob,
but she is pleased that he makes all the strategic decisions.
Jacob has delegated the day-to-day running of the school to Mrs K. Whenever he meets the
staff at the school he likes to listen and he wants to learn about what challenges them in
their work. The teachers and management want to help Jacob achieve his vision for the
school. He is very effective at negotiating with external organizations and promoting the
school, and is the main force for innovation and change.
Jacob has undertaken further market research into what families living in Dodoma want
from a school. He used a convenience sampling method that involved talking to friends and
relatives.
Jacob is concerned with cash flow. Although the school year starts in January, fees are not
collected until April, the time when local people traditionally have higher incomes. At the
moment all purchases are made in cash. Table 1 shows the latest cash-flow forecast for the
next six months.
Define the term economies of scale (line 36).
7b. [4 marks]
Explain one advantage and one disadvantage for Jacob of using convenience sampling.
7c. [2 marks]
Calculate the value of X and the value of Y in Table 1.
7d. [2 marks]
With reference to Table 1, explain one way in which MSS could improve cash flow.
7e. [10 marks]
Discuss the differences in leadership style between Jacob and Mrs K.
8a. [2 marks]
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.
State any two stages of the working capital cycle.
8b. [2 marks]
Calculate for GT:
the payback period for the €44 million investment in new equipment based on the
forecasted increase in net cash flow (show all your working).
8c. [2 marks]
Calculate for GT:
the average rate of return (ARR) based on an annual increase in net cash flow of €6000 and
assuming an asset life of the new equipment of eight years (show all your working).
8d. [4 marks]
With reference to GT, explain one advantage and one disadvantage of debt factoring.
8e. [10 marks]
Examine Elaine’s proposals to cut back on GT’s commitment to its employees and CSR
practices.
9a. [2 marks]
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.
State two features of a partnership.
9b. [6 marks]
Prepare a monthly cash-flow forecast for TC for the first six months of operation.
9c. [2 marks]
Calculate TC’s forecasted net profit at the end of June (show all your working).
10a. [2 marks]
Anubis
Tom operates Anubis as a sole trader, selling cell/mobile phone cases on the internet. The
market is increasingly competitive. The retail price of phone cases is predicted to fall in the
second quarter of 2018. Employees at Anubis will receive a 3% rise in wages starting from
1 April 2018.
Tom has forecasted the following monthly cash outflows for January through March 2018:
• Heating and lighting: $4000.
• Wages: $50 000.
• Packaging: $15 000.
• Delivery charges: 5 % of sales revenue.
• Cost of goods sold: $220 000.
Additional information:
• Opening balance on 1 January 2018: $8000.
• Sales revenue: $300 000 each month.
• Rent of $2000 paid quarterly: first payment in January 2018.
• Receipt of a tax refund in February 2018: $3000.
Outline two appropriate external short-term sources of finance for Anubis other
than loans from family and friends.
10b. [5 marks]
Using the information above, prepare a fully labelled cash-flow forecast for Anubis
from January to March 2018.
10c. [3 marks]
Comment on the predicted cash flow for Anubis for 2018.
11a. [2 marks]
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 CL 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.
Define the term fixed cost.
11b. [2 marks]
Calculate the break-even quantity of meals that CL must sell to pay for the increase in fixed
costs of $3000 to provide these meals (show all your working).
11c. [6 marks]
Using the information in the table only, prepare a monthly cash flow forecast, for CL, for
the first six months of operation.
12a. [2 marks]
German Car Keys Limited (GCK)
For decades, German Car Keys Limited (GCK) has made car keys for various car
manufacturers. It is 100 % owned by Schmidt family members. New apps on mobile
smartphones may soon replace traditional car keys. Car owners will have in their phone an
“e-key”, which will unlock doors and start the car. Car hire companies like e-keys because
they are cheaper than physical keys and can be easily downloaded.
This innovation in car keys could put GCK out of business. Shareholders are shocked. For
years, they believed that GCK had a secure place in the market. GCK’s market share and
profits were high and debt was low. However, rather than make investments in new
product lines, GCK made only minor modifications to the physical car keys and paid high
dividends to satisfy shareholder expectations. As a result, the company does not have a
portfolio of products. It relies on one single product.
GCK conducted market research and identified two other car components it could
manufacture. GCK has many skilled workers, and the factories will have to be upgraded at
significant cost. GCK is now looking for ways to finance the renovation of the factories. If e-
keys become popular (as predicted) and action by GCK is not taken quickly, this old car key
company may find itself out of business.
[Source: adapted from www.telekom.com]
State two secondary methods (sources) of market research for GCK.
12b. [4 marks]
Using a fully labelled Boston Consulting Group (BCG) matrix, explain the position of GCK’s
current product (physical car keys).
12c. [4 marks]
With reference to GCK, explain the relationship between investment and profit.
12d. [10 marks]
Discuss two appropriate sources of finance for the renovation of GCK’s factories.
13a. [2 marks]
Bip Bip (BB)
Nicolá s 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. BB 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, BB would like to offer an online booking
service in addition to their website. Nicolá s believes that an online booking service will
allow BB 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, Nicolá s 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 BB should offer an online booking service the following year.
Describe one reason why customers might be reluctant to use an online booking service (e-
commerce).
13b. [2 marks]
Identify two features of a partnership.
13c. [6 marks]
Prepare a monthly cash-flow forecast, for BB, for the fi rst six months of operation.
13d. [3 marks]
Explain BB’s forecasted cash-flow position.
13e. [2 marks]
Calculate the forecasted net profit, without any depreciation, for the first six months of
operation (show all your working).
13f. [2 marks]
In June 2016 BB discovered that some of their forecasts had been inaccurate.
For December 2015, and January and February 2016, variable costs had been 10 % lower
than forecasted.
Calculate the impact of lower variable costs on BB’s closing cash balance, at the end of
February 2016 (show all your working).
13g. [2 marks]
In June 2016 BB discovered that some of their forecasts had been inaccurate.
For December 2015, and January and February 2016, variable costs had been 10 % lower
than forecasted.
For March, April and May 2016, revenue was 10 % higher.
Calculate the impact of lower variable costs and higher revenue on BB’s closing cash
balance, at the end of May 2016 (show all your working).
13h. [6 marks]
Analyse the role of budgets and variances, in strategic planning, for businesses such as BB.

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