March looks bad: It is early January 2026. Marco has finished the bakery's cash-flow forecast for the next three months, and the last number is in brackets.
Why March looks bad
- After Christmas, fewer people buy cakes and the cafés and hotels are slow to pay.
- The wages, the rent and the flour cost the same as ever.
- In March two extra bills land: Valley Grain's Easter flour order and the vans' insurance for the year.
| Lena's Bakery Ltd ($) | January | February | March |
|---|---|---|---|
| Opening balance | 25,000 | 17,000 | 5,000 |
| Cash in (shop sales, cafés and hotels paying) | 118,000 | 114,000 | 125,000 |
| Cash out (wages, flour, rent, running costs) | 126,000 | 126,000 | 148,000 |
| Net cash flow | (8,000) | (12,000) | (23,000) |
| Closing balance | 17,000 | 5,000 | (18,000) |
The bakery made a profit last year, but by the end of March it will be $18,000 short. The layout is the forecast from 3.7.2, and the reasons are the causes from 3.7.3.
There are only three ways to close a gap like this: get more cash in, or get it in sooner (raise inflows); send less cash out, or send it later (cut outflows); or bring in money from somewhere else to cover the gap (extra finance). This section is the first way.
Four ways to bring cash in sooner
Chase what customers owe
The cafés and hotels buy about $20,000 of bread a month and agreed to pay within 30 days, but they owe $40,000: about two months. Holding them to 30 days (credit control) brings about $20,000 in once.
Drawback: a hotel pushed too hard may buy from a bakery that lets it pay later.
Reward paying early
Offer 2% off to any café or hotel that pays within 10 days (an early-payment discount). The cash arrives weeks sooner.
Drawback: the bakery keeps 2% less of those sales, about $400 a month, so profit falls.
Give less credit
Shorten the credit period for new wholesale customers, or ask them to pay on delivery. Less money is waiting to come in.
Drawback: a customer choosing between two bakeries may pick the one that gives credit.
Sell more, or charge more
Push the lunch trade in the quiet months, or raise the price of a loaf. More cash comes in if customers keep buying.
Drawback: it is slow to work, and a price rise may send customers to Goldcrust or the supermarket.
Sooner is not the same as more: Chasing the cafés and hotels does not earn the bakery an extra dollar. It collects money it is already owed, earlier. That is exactly what a cash-flow problem needs.
An early-payment discount does the same and costs profit: the cash arrives sooner, but less of it.
Free preview
This is the free notes preview
You're reading the free notes. Aimnova Pro unlocks the full study experience — and you can try it with your first topic free to keep:
- FlashcardsLock in vocabulary and key terms with spaced repetition.
- Practice questionsAnswer exam-style questions and get instant AI marking.
- Mock exams & past-paper vaultSit full mocks and see exactly how examiners award marks.
- Personalised study planA daily plan built around your exam date and weak areas.
Valley Grain's Easter flour order, $12,000, is due in March. Marco rings the cooperative and asks: could the bakery pay for this order in 45 days instead of the usual 30?
The second way to fix cash flow: If Valley Grain says yes, the $12,000 leaves in April, after March's gap has passed.
That is the second way to fix cash flow: cut outflows, which means sending less cash out, or sending it later.
Five ways to send less cash out, or later
Ask suppliers for more time
Longer trade credit from Valley Grain: 45 days on the Easter order keeps $12,000 in the bank until April.
Drawback: Valley Grain's farmers need their money too. It may refuse, charge more, or put the bakery last in the queue for deliveries.
Hold less stock
Order flour every week instead of every two weeks. Less cash sits in sacks in the Mill Lane store, which frees about $5,000 once.
Drawback: if a delivery is late, the night shift has nothing to bake at 2 a.m., and small orders may lose a bulk discount.
Cut costs
Shorter opening hours at Park Road on quiet winter evenings, or less overtime at Mill Lane, lower the wage bill.
Drawback: fewer sales in the lost hours, and staff who lose hours may lose heart, or leave.
Delay spending, or lease instead of buying
Put off the new card tills until the summer, or lease equipment rather than pay for it all at once (3.2.4).
Drawback: the old tills stay slow, and leasing costs more in total over the years.
Pay out less to the owners
A smaller dividend keeps cash in the business.
Drawback: Lena, Marco and Marco's cousin get less than the $30,000 they shared last year, and shareholders who expect a steady dividend may be unhappy.
Cutting the wrong cost: Some cuts save cash this month and lose more next month. Cheaper flour that makes worse bread, or no advertising for the new lunch menu, means fewer customers later, and less cash coming in.
Delaying a supplier too long is the same trap: if Valley Grain stops delivering, there is no bread to sell.
Notice the difference between delaying and cutting. Paying Valley Grain in April does not make the flour cheaper: the $12,000 still has to be paid, one month later. Cutting overtime removes the cost altogether. A delay moves the problem to a month with more room; a cut makes it smaller.
Memorize terms 3x faster
Smart flashcards show you cards right before you forget them. Perfect for definitions and key concepts.
The overdraft is not quite enough: The bank lets the bakery overdraw by up to $30,000, and $15,000 of that is already used. So the overdraft has $15,000 of room left.
Still $3,000 short: March's gap is $18,000. Even if Lena uses every dollar of the overdraft, the bakery is still $3,000 short.
Borrow for a short time
- An overdraft covers a gap of a few weeks, and interest is paid only on what is used
- A short-term bank loan covers a known gap and is repaid over a year
- Drawback: interest is charged, and the bank can cut an overdraft at short notice
- Drawback: loan repayments are new cash outflows in the months that follow
Sell something
- The three old shop ovens, cold since Mill Lane opened, would fetch about $18,000
- Sale and leaseback: sell an asset and rent it back, so the business keeps using it
- Drawback: a sale works once, and the ovens' $18,000 was meant for the Station Road shop
- Drawback: after a sale and leaseback, rent is paid every month for years
Bring in the owners' money
- Lena and Marco lend the company their own money, or buy more shares
- New shares could be sold to an outsider, such as the business angel who offered for Station Road
- Drawback: the owners' savings are now at risk in the business
- Drawback: new shares for an outsider mean Lena and Marco give up part of the control
One more way uses the money customers owe. A factoring company pays the bakery most of the $40,000 the cafés and hotels owe straight away, then collects the debts itself. The cash arrives now, but the factor keeps a fee, so the bakery receives less than it is owed, and its customers now deal with a stranger chasing them for payment.
Long-term money for a short gap: Matching the finance to the need (3.2.3) applies here too. A gap of one or two months calls for short-term finance, such as an overdraft.
Selling shares to an outsider to get through March would solve a problem of weeks by giving away part of the company for good.
A doctor asks what is wrong before choosing the medicine. A cash-flow fix works the same way: find the cause first (3.7.3), then pick the fix that removes it. The fix that suits one cause can make another worse.
| Cause of the problem | A fix that suits it | Why it fits |
|---|---|---|
| Customers pay late (poor credit control) | Chase debts; an early-payment discount; factoring | It collects money the business has already earned |
| Too much stock | Order less, more often; sell off slow lines | It turns stock back into cash, and less cash goes out on new stock |
| Quiet months (seasonal demand) | An overdraft; build up cash in the busy months | The gap is short and comes back each year, so short-term borrowing covers it |
| A big, unexpected bill | Ask for more time to pay; a short-term loan; sell an unused asset | It spreads one large outflow, or meets it with a one-off inflow |
| Growing too fast (overtrading) | Slow the growth; long-term finance for the new shop | The gap is caused by the growth itself, so it keeps coming back until the growth is paid for |
The bakery's three causes: The forecast shows three causes at once: quiet months after Christmas, cafés and hotels taking two months to pay instead of one, and two large bills landing in March.
So test each fix against March's closing balance of ($18,000), and look at what it costs the bakery.
| Fix | March's closing balance | The drawback for the bakery |
|---|---|---|
| Cafés and hotels pay within their 30 days | ($18,000) + $20,000 = $2,000 | Some may take their orders to a bakery that is less strict |
| Valley Grain gives 45 days on the Easter order | ($18,000) + $12,000 = ($6,000) | Still short; the $12,000 is due in April, and Valley Grain may say no |
| Order flour weekly (less stock) | ($18,000) + $5,000 = ($13,000) | Still short; a late delivery stops the night shift |
| Sell the three old shop ovens | ($18,000) + $18,000 = $0 | Nothing to spare, a one-off, and the money was meant for Station Road |
| Use the rest of the overdraft | ($18,000) + $15,000 = ($3,000) | Still short, and interest is charged on every dollar used |
Fix the cause, then cover the rest: Only one fix goes to the heart of the problem: the cafés and hotels paying on time. It closes the gap on its own and keeps working every month after, while the others cover March once and leave the cause in place.
Add the 45 days, then judge: Add Valley Grain's 45 days and March ends at $14,000, with the unused overdraft kept for an emergency. A good answer names the fix, shows what it does to the numbers, and says what it costs this business.
Know your predicted grade
Take timed mock exams and get detailed feedback on every answer. See exactly where you're losing marks.
How this comes up: This comes up in two shapes: a short two-mark question after a cash-flow forecast, and a longer ten-mark question on a case.
| Question | Marks | What earns them |
|---|---|---|
| Explain one method the business could use to solve its cash-flow problem. | 2 | One mark for the method, the other for showing why it suits this business, using the case. |
| Recommend which of two options the business should choose to solve its cash-flow problem. | 10 | Weighing both options and ending with a decision. |
The two-mark pattern
- Name one method and say what it does to the cash: faster inflows, smaller or later outflows, or extra finance to bridge the gap.
- Tie it to the case: a fact that makes it suit this business, such as the months that are negative, a supplier it gets on well with, or customers who pay late.
- Stop there. One method, explained and applied. A second method adds nothing.
The name is not the application: 'The bakery could get an overdraft' is one mark, however often the word bakery appears. The second mark needs a reason from the case: the overdraft would cover the ($18,000) in March.
And a method must fix cash, not only profit: 'increase sales' with no reason it would bring cash in by March is a wish, not a method.
Explain one method that Lena's Bakery Ltd could use to solve its cash-flow problem.
Model answer plan
See the answer broken into clear points, with guidance on how each point earns marks.