Sophie Carter - Cash flow queen or not?
Sophia Carter, an ambitious entrepreneur, had built one single revenue stream around her boutique skincare brand. Sales were soaring (after huge advertising spends), and her business was expanding into new markets. Her latest cash flow forecast reassured her—projected cash inflows looked strong, with steady growth in sales revenue. With confidence, she increased her marketing budget and placed bulk orders, unknowingly overstocking her warehouse, garage and house!
Encouraged by her suppliers, she took on over borrowing to fund an exclusive product launch. A loan officer assured her that with her rising revenues, the repayments would be manageable. Meanwhile, eager to drive customer loyalty, she extended lenient payment terms to retailers (debtors),which she didn’t always record or track! Meanwhile, wanting to maintain a good relationship and credit score with suppliers, Sophie duly paid her suppliers at the point of purchase!
Discussion Questions: Sophie Carter - Cash flow queen or not?
- Without knowing too much about cash-flow, what possible problems can be identified from the short blurb?
- Without knowing too much about cash-flow….are there / is there any obvious issue that could be addressed that might improve her cash flow or the way in which she does business?
Not all artists have their head in the clouds! A talented young digital artist called Richard hoped to open a small shop to sell their digital art, comics and cartoons. Before starting, Richard (who knew a little about business) decided to create a cash flow forecast to see if the project was viable.
Richard’s main targeted clients would be people passing by the shop, but also by selling online too! Richard plans to start trading on August 1st and has initial capital to start the shop of $10,000
- Sales for the first four months are forecast as $2000 (Aug), $3000 (Sept), $4000 (Oct), $4000 (Nov)
- Stock purchases to be half the value of sales each month
- Rent is paid every 2 months, starting in September. Each payment is $3000
- Utility bills are expected to be $750 a month
- Other expenses are expected to be $2500 per month
Initially, Richard knew the format would look something like below, be he had no clue how to complete the cash flow so he used the template below to set up his own!
QUESTIONS FROM CASH FLOW FORECAST #1
- Define the term cash inflows [2]
- Use the information to construct a cash flow forecast for Richard [6]
- Explain two possible causes of the cash flow problem that Richard is experiencing [4]
- Explain two ways that Richard might be able to resolve his anticipated cash flow problems [4]
After looking at the cash flow forecast, Richard knew there was a problem! He could see there was a liquidity problem! He talked to a friend who was also a successful entrepreneur, and he got some advice! The advice was that Richard should look for ways to reduce his costs whilst increasing the number of revenue streams in order to improve his cash flow!
Richard did some thinking, implemented the advice he had been given and came up with a new cash flow forecast.
Richard took his friends advice and decided to create a new forecasted cash flow.
This time he would start with $15,000; he would reduce his costs by not renting a shop, but instead, working from home. Whilst this meant he would lose some sales; he had a plan! Instead of shop sales, he would try to boost his online sales with paid advertising. Richard would also increase his revenue streams by earning money from paid adverts on his website! He would also attend more conferences where he could sell his art. He would also attend schools to sell his time to train and deliver art-based courses to students. Finally, he would also tutor people and give private classes (individual and group classes).
- Online sales for the first four months are forecast as $2500 (Aug), $3500 (Sept), $4000 (Oct), $4500 (Nov)
- Revenue made from hosting paid adverts on his website would be $100 a month.
- Revenue from attending conferences would be $400 every other month, starting in August.
- School, private and group training would earn Richard $2000 a month each month.
- Stock and materials purchases to be half the value of online sales per month.
- Other expenses are expected to be $2500 per month.
QUESTIONS FROM CASH FLOW FORECAST #2
- Use the new information above to construct a cash flow forecast for Richard [6]
- Comment on the liquidity position of Richard based on the cash flow forecast [4]
KEY TERMS FROM THE CASH FLOW FORECAST CASE STUDIES
Unit 3.7 Cash flow forecasts #1 and #2
CASH FLOW #1
Define the term cash inflows [2]
See below!
Explain two possible causes of the cash flow problem that Richard is experiencing [4]
Firstly, Richard is experiencing a problem with the size of his net cash flow (the difference between inflows and outflows). They are imbalanced and too heavily weighted in terms of outflows! This creates a problem which becomes more serious each month
Secondly, it is possible that Richard mayy be able to improve his sales in the future, but in the short term, there is not enough money invested in the business to allow him to continue trading without the need for additional finance! He is already into negative cash flow by November!
Explain two possible solutions for Richards cash flow problems
Richard could delay starting to trade until he has sourced additional loan finance or saved more money to get him through the early stages of launching his business
Richard should investigate a larger number of streams of income to increase his inflows
Whilst at the same time, Richard should examine cutting costs or reducing his outgoings
Specifically, Richard could also cheaper suppliers for his materials
If none of these suggestions are practicable then Richard could investigate looking at his charging policy and see whether his prices are too low in relation to the market price.
CASH FLOW #2
Use the new information to construct a cash flow forecast for Richard [6]
See below
Explain the liquidity position of Richard based on the cash flow forecast [4]
The liquidity has improved remarkably, after taking his friends advice. There is a positive net cash flow every month from the start of trading
This positive flow stems from reducing costs, increasing revenue streams, but also starting with a much larger opening balance of $15,000
How does cash flow connect to the wider world
In the realm of IB Business Management, mastering the art of the cash flow forecast is paramount. This tool, central to Unit 3.7, empowers businesses to anticipate their net cash flow, ensuring they maintain optimal liquidity.
Liquidity: The Double-Edged Sword
Liquidity reflects a company’s ability to meet short-term obligations. Adequate liquidity ensures operational stability, while insufficient liquidity can precipitate financial turmoil. Conversely, excessive liquidity might indicate underutilized resources that could be better invested.
Real-World Illustrations
Consider Nikola Corporation, an electric vehicle startup that recently filed for Chapter 11 bankruptcy. Despite initial success, the company faced financial difficulties, including technical challenges and substantial quarterly losses, leading to its downfall.
In contrast, Thyssenkrupp, an industrial conglomerate, recently raised its free cash flow outlook due to a significant submarine order. This influx of cash has bolstered the company’s financial position, highlighting the importance of positive cash flow in sustaining operations.
The Small Business Struggle
Small businesses often grapple with cash flow challenges, especially in their formative years. High initial costs, coupled with unpredictable revenue streams, can strain liquidity. A recent study indicates that one in five U.S. small and medium-sized businesses could exhaust their cash reserves within months, underscoring the vulnerability of these enterprises to financial shocks.
Balancing Act: Efficiency and Cash Flow
Efficient cash flow management is a delicate balance. Companies must ensure they have sufficient liquidity to meet obligations without hoarding excess cash that could be invested for growth. Regularly updating cash flow forecasts allows businesses to navigate this balance, making informed decisions about expenditures and investments.
Key Takeaways for IB Business Management Students
Proactive Forecasting: Regular cash flow forecasting enables businesses to anticipate and prepare for financial needs.
Liquidity Management: Maintaining optimal liquidity is crucial; both deficits and surpluses can have adverse effects.
Learning from Real-World Cases: Analyzing successes and failures, like those of Nikola and Thyssenkrupp, offers valuable insights into effective cash flow management.
By integrating these principles, students can develop a robust understanding of cash flow dynamics, preparing them to navigate the financial complexities of the business world.