Key Idea: Topic 3.7 is about cash flow, why it matters, how to use forecasts, what causes problems and how to improve cash flow. At HL, students are expected to analyse cash-flow problems more sharply, link them to business growth and debt, and evaluate solutions rather than just listing them.
💵 Cash-flow basics: **Cash inflow —** money coming into the business. **Cash outflow —** money leaving the business. **Net cash flow —** inflows − outflows. **Closing balance —** opening balance + net cash flow.
⚖️ Cash flow vs profit: **Profit —** revenue minus costs. **Cash flow —** actual money movement. **Profit but no cash —** customers have not paid yet. **Cash but no profit —** loans or asset sales.
🛠️ Match problem to solution: **Customers pay late —** tighten credit control. **Too much stock —** reduce stock levels. **Seasonal dip —** use overdraft or reserves. **Short-term pressure —** arrange finance in advance.
⚠️ Trade-offs: **Overdraft —** flexible but expensive. **Factoring —** lose part of revenue. **Cutting stock —** risk of shortages. **Delaying payments —** may damage supplier relationships.
HL exam tip: Go beyond identifying the problem — explain the cause, the business effect, and why that problem matters now.
Past-paper tip: HL markschemes repeatedly reward financial analysis that connects liquidity pressure to wider finance issues such as gearing, debt servicing, repayment ability and future borrowing capacity.
Evaluation tip: a strong answer explains both benefits and drawbacks of cash-flow solutions. For example, an overdraft solves short-term pressure quickly but increases finance cost and risk.
Example: A strong answer: Cash-flow problems may arise because customers are paying late, delaying inflows. This means the business may struggle to pay suppliers and wages despite strong sales, which could damage operations and relationships.
Important: Common triggers: explain cash flow vs profit, complete forecasts, identify causes of cash-flow problems, recommend improvements, evaluate strategies such as overdraft, trade credit, factoring or tighter credit control.
- Identify the type of question
- Use correct cash-flow terminology
- Calculate if needed
- Explain the cause and business impact
- Link solution to cause
- Evaluate the solution using cost, speed, risk and relationship effects