Key Idea: In 3.7, IB wants you to understand cash flow, why it matters, how to use forecasts, what causes problems, and how to improve cash flow. This topic is heavily about timing.
💵 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 haven’t paid. **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.
⚠️ Trade-offs: **Overdraft —** flexible but expensive. **Factoring —** lose part of revenue. **Cutting stock —** risk of shortages. **Delaying payments —** may damage relationships.
Always show working when completing or amending forecasts.
Go beyond identifying the problem — explain the cause and business impact.
Evaluate solutions by explaining both benefits and drawbacks.
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.
Important: Common triggers: explain cash flow vs profit, complete forecasts, identify causes, recommend improvements, evaluate strategies.
- Identify the type of question
- Use correct terminology
- Calculate if needed
- Explain impact on the business
- Link solutions to causes and evaluate