IB Business Management SLTopic 3 — Cash FlowPaper 1 & 2Core skill~11 min read
Fixing a Cash Flow Problem
There are only two ways to improve cash flow: get money in sooner, or send money out later. Every strategy on the syllabus is one of those two — and every one of them has a cost that a good answer names.
📚 What you need to know
The best fix is better management: forecast early, budget properly, set clear financial objectives.
Speed money in: shorter credit for customers, chase debtors, sell excess stock, introduce new capital.
Slow money out: longer credit from suppliers, delay non-urgent spending, cut or postpone costs.
Borrow the gap: overdrafts and short-term loans, which raise current liabilities.
Sale and leaseback raises a large sum but creates a permanent rent cost.
Cash flow, profit and investment behave differently at each stage of a business’s life.
Too much cash is also a failure — it earns nothing while it sits there.
Two directions, that is all
Notice that most of the left column annoys customers and most of the right column annoys suppliers. That is the real trade-off in cash flow management.
Method
What it does
The cost of doing it
Shorten customer credit
Debtors turn to cash faster, raising current assets
Customers may switch to rivals with easier terms
Extend supplier credit
Cash stays in the business longer; liabilities unchanged
Suppliers may refuse, raise prices or stop delivering
Overdraft or short-term loan
Immediate cash to cover a gap
Interest, and current liabilities rise; banks dislike lending to firms already short
Sell excess stock
Slow stock becomes cash; storage costs fall
Usually needs discounting, which loses margin
Sale and leaseback
A large cash sum while still using the asset
Permanent rent; the asset and its future value are gone
Introduce new capital
Current assets rise with no new debt
Dilutes control if it comes from outside investors
Cut costs
Outflows fall every month, not just once
Cutting marketing or staff can shrink future revenue
Two of these are one-off and the rest are ongoing. Selling stock or an asset buys you a single month; renegotiating credit terms or cutting a cost helps every month. If a case study shows a recurring shortfall, a one-off fix is the wrong recommendation.
Cash flow across a business’s life
The same firm has completely different cash problems at different stages, and examiners like you to notice which stage the case study is at.
Investment is money spent now to create value later, so it always hits cash before it helps profit. Say that when a case study buys machinery.
Worked examples
WORKED EXAMPLE 1
How much does faster collection release? [5 marks]
A wholesaler has annual credit sales of $730,000 and currently gives customers 60 days to pay. It plans to reduce this to 40 days. Calculate the cash this would release.
Step 1: daily credit sales$730,000 ÷ 365 = $2,000 a dayStep 2: money tied up at 60 days$2,000 × 60 = $120,000Step 3: money tied up at 40 days$2,000 × 40 = $80,000Step 4: the difference$120,000 − $80,000 = $40,000 released$40,000 of cash freed, with no borrowingthen give the risk: customers who value 60-day terms may buy elsewhere, so the $40,000 could cost sales
WORKED EXAMPLE 2
Choosing the right fix [10 marks]
A garden centre forecasts a $14,000 shortfall in January and February, its two quietest months, and a strong surplus every summer. The owner is considering selling the delivery van, worth $18,000, to cover it. Evaluate.
Step 1: name the type of problemSeasonal and temporary, not structural. The business earns well for most of the year.
Step 2: test the owner’s plan
Selling the van raises $18,000 once and solves this winter. It also removes an asset the business needs every summer, and it can only be done once.
Step 3: match a fix to the problem
A temporary gap needs temporary money: an overdraft arranged in autumn, sized at around $15,000.
Step 4: add the cheap fixes
Take deposits on spring orders, run a winter stock clearance, and ask suppliers for 60-day terms over the quiet months.
Arrange an overdraft; keep the vanthe principle to state: match short-term problems to short-term finance, and never sell a productive asset to fix a timing issue
💡 Exam tip
Diagnose first. Is the shortfall temporary and seasonal, or is the business losing money every month?
Give two or three specific actions, not a list of everything you know.
Name the cost of each action — lost customers, angry suppliers, interest, lost margin.
Say when the action should happen. Arranging finance early is half the answer.
Use the numbers in the case: how big is the gap, and does your fix actually cover it?
Remember cash flow fixes do not raise profit. Do not claim they do.
⚠ Common mix-up
“Increase sales” as a cash fix. More credit sales can make cash flow worse in the short run.
Selling assets to plug a monthly gap. One-off money cannot fix a repeating problem.
Assuming the bank will always lend. Banks are least willing exactly when a firm is short.
Ignoring the effect on relationships. Suppliers and customers react to changed terms.
Cutting marketing without comment. It helps this month and can shrink next quarter’s revenue.
Treating a large cash pile as success. Idle cash is an opportunity cost, especially when rates are high.
Up next: The Payback Period — deciding whether a big piece of spending is worth doing in the first place.
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