Business Management HL

What I want to achieve for this class based on MYP experience:

Goals: I would like to have a full comprehension of the course, learn to make analytical and informed decisions and be able to understand/link key concepts of business together.

Strategy: I will review my notes after and before every class, read ahead using Kognity, complete the shoulds and clouds (if possible). I will create practice tests on Knowt using AI and flashcards to memorize key concepts.

Business Management Tools

SWOT: is a simple tool for a business to analyze its internal strengths and weaknesses, and external opportunities and threats. A SWOT analysis can help a business understand its current position and identify strategies to improve the business. Useful for a more focused internal and external analysis, helping to identify areas where the company has control (strengths/weaknesses) and areas where it must adapt (opportunities/threats) 

STEEPLE: Sociocultural, technological, economic, environmental, political, legal and ethical.Useful for a comprehensive analysis of the external environment, providing insights into broader societal and environmental trends that could affect the business.

1.1 Introduction to Business Management

What is a Business?/Nature of Business

Aims to meet the needs of individuals/organizations through:

• Production/Extraction 

• Creating a product

• Providing service

Input Resources and Process:

• Desired Output (Added value)

  • Human

  • Physical

  • Financial

  • Enterprise

• Resource outputs:

  • Production (Goods and Services)

Resource Outputs:

• Human: Appropriate quality/quantity of people required for production/service. 

• Physical: Right quality and quantity of materials, machinery, and land needed for production/service.

• Financial: Quantity of cash and forms of finance to make product/service.

• Enterprise: Ideas and determination to make ideas into a functioning and successful business.

Production Processes:

• Capital-Intensive: Uses a large proportion of land/machinery relative to other inputs, especially labor.

• Labor-Intensive: Uses a large proportion of labor relative to other inputs such as land/machinery

Product Outputs:

• Goods: Tangible outputs that can be physically taken home

• Services: Intangible and larger; cannot take home physically

Business Functions/Departments:

• HR (Human Resources): Ensuring that appropriate people of appropriate skill sets are employed to create product/service and that they are suitably rewarded deciding on their salaries. HR must recruit, train, dismiss and determine appropriate compensation of employees

• Finances and Accounts: Ensuring that appropriate funds are made available to make products/services. Make forecast requirements, keep accurate records, procure (obtain) financial resources from various providers and ensure proper payment for goods and services acquired to operate business

• Marketing: Ensuring that business offers a product/service that is desired by a sufficient number of people or businesses for profitable operations. Marketing department must use appropriate strategies to promotie, price, package and distribute product/service

• Operations management/production: Ensuring that appropriate processes are used to make product/service of desired quality. Operations management must control quantity/flow of stock, determine methods of production, look for ways to produce good/service more efficiently

Small vs Large Businesses

• Small businesses can adapt to changes in the market faster, while large businesses have more resources, reach, and name recognition.

Sectors of Businesses:

Primary: 

Definition: Involves extraction and harvesting raw materials; part of extraction and utilization of natural resources. Activities include farming, mining, fishing, and forestry

• John Deere plays a significant role in modern farming by providing equipment that enhances productivity

• Rio Tinto specializes in the extraction of minerals and metals, crucial for various industries

• Marine Harvest operates fish farms to sustainably produce seafood

Secondary:

Definition: Processes materials extracted from primary sector into finished goods using manufacturing, construction and production

• Tesla manufactures electric vehicles using raw materials such as lithium for batteries, which are assembled into cars in their factories

• Bechtel engages in large-scale construction projects, including infrastructure like roads, bridges, and buildings

• Nike uses raw materials like cotton and synthetic fibers to produce apparel and footwear 

Tertiary: 

Definition: Service is provided, sometimes with manufactured products.This includes retail, entertainment, financial services, education, and hospitality

• Walmart operates a vast network of stores where goods are sold to consumers. They also offer online shopping, integrating multiple sales channels.

• PayPal provides digital payment, secure transactions between consumers and businesses globally

• Marriott International offers lodging services worldwide, Quaternary: Subcategory of tertiary sector; providing and selling services based on the transfer of knowledge and information

Quaternary:

Definition: Subcategory of tertiary sector; providing and selling services based on the transfer of knowledge and information. Knowledge based business including research development/information technology

• Pfizer invests in pharmaceutical research to develop new medications and vaccines

• Google provides digital services, including search engines which offers information to users

• Coursera offers online courses that provide education and training

Opportunities and Challenges of Starting a Business:

Reasons for Starting a Business:

• Rewards: Wanting a larger return of capital and higher proportion of earnings.

• Independence: Want to be your own boss.

• Necessity: Need an income but were made redundant/could not find work.

• Challenge: Want a challenge and to see if they can manage it.

• Interest: Passionate about their field.

• Finding Gaps: Opportunities for something like a first mover’s advantage.

• Sharing Ideas: Selling an idea or something to others.

Process of Starting a Business:

1. Organize basics - Entrepreneur must address basic questions and needs of business such as location, name, legal structure, operations, suppliers, customers and government services

2. Research the market - Determine target markets, testing of concepts, unique selling propositions, ways of marketing towards the market

3. Planning business - Writing a document that addresses issues before operations begin. Useful for multiple stakeholders/pitch to investors/financiers as it gives solutions to issues, entrepreneur has to plan out how the business will operate 

4. Meeting legal requirements - Business must be registered with adhering to labour laws and tax requirements must be paid such as income and also payroll tax

5. Raising finance - Must attract finance until it can sustain operations from profit during break even point. Usually must attract start up finance from entrepreneurs themselves or investors which can be in the form of equity capital (partial owner of business/investments) or may be lenders/loaners to the business

6. Testing market - Launch of the business in which they have to decide scale of operations, test the market to verify and get feedback from customers to find out chances of success

Challenges New Businesses May Face:

• Organization: Inappropriate location, bad structure, unreliable suppliers.

• Market Research: Poor research, not good target market, too optimistic test and weak communication.

• Business Plan: Unconvincing, too vague.

• Legal Requirements: Labor laws not addressed, relevant registration and tax not addressed.

• Finance: Difficulty securing raising capital, too difficult, and medium-long term finance too difficult.

• Market: Failed launch, inadequate pilot, limited success/no inspiration.

Entrepreneurship:

Process of identifying a business opportunity, organizing resources and taking appropriate risks with starting/managing businesses. Entrepreneurs are skilled at identifying opportunities through observing trends, understanding consumer behavior. They are innovative, take significant risks to grow the company and manage operations of the business. Their work involves understanding markets/communities and their problems, planning solutions, taking actions and growing their actions.

Practice/Homework

My Own Business (Imaginary):

If I were to start my own imaginary business, I would start a hotel agency in Thailand due to the tourism there. The target market would be foreigners especially from the western market. The business model would be a partnership in which financing is raised from equity investments.

Linking Key Concepts (Change, Creativity, Ethics and Sustainability) of Business Management to companies/businesses with examples:

• Change - Wizz Air launches have added a flight subscription due to

criticism of customer service and flight delays. This prompted

the business to add new ticket subscriptions at a discounted

price in order to keep customers.

• Creativity - Nike’s “Move to Zero” Space Hippie sneakers are made from recycled materials such as plastic bottles, t-shirts. This is an innovative response to environmental responsibility but also aligns with the creation of a unique aesthetic. 

• Ethics - Microsoft has created an AI Ethics Committee to manage the development of AI. This is an example of ethical consideration and prioritizing AI safety while developing new tech. 

• Sustainability - Virgin Atlantic has a commitment to sustainable aviation (environmental sustainability) preparing for sustainable aviation fuel to reduce carbon footprint

Starbucks: a large coffee store chain with its headquarters in the United States, has been profitable for years and thus has considerable cash and other resources, Starbucks wants to open coffee shops in India, which has a large population and is potentially a large market. The laws of India regarding foreign businesses operating in the country present an obstacle to Starbucks. To get around this legal obstacle, Starbucks is considering working with Tata coffee, a major Indian company that has its own coffee shops and is involved in aspects of the coffee business besides retail. In addition to Coffee shops, Tata coffee also owns coffee Farms where coffee is grown. Its labor force on these farms is trained and knowledgeable. 

a) With reference to Starbucks and Tata coffee, explain the role of businesses in combining two of the following human resources, physical resources, or financial resources to create goods and services. [4]

Attempt: Human resources are the departments that manage the employees of the business including recruiting, training, compensation of workers and evaluating performance. Finance and accounting refer to the making of available funds to run the business with the job of the department to make forecasts, keep accurate records and obtain financial resources from providers/people. With Tata Coffee and Starbucks working together, Tata Coffee can provide employees who are trained and knowledgeable in the industry especially related to that region. Another advantage of the partnership between Tata and Starbucks is that Starbucks having the financial resources can provide the funding for the business allowing for Tata to have expansion of business due to the ability to develop the business in the retail sector also giving ability to add technological innovation and have more than sufficient finance.

Model Answer: Human resources are the people that work in a business. Human resources are also the skills and knowledge that those people have and which make them suitable to work in a particular business. One advantage of the business arrangement for Starbucks is that Tata Coffee already has employees trained and knowledgeable in this industry. Another advantage for Starbucks is that Tata Coffee already has in place the physical resources, from coffee farms to coffee shops, which Starbucks can leverage to its global brand. Another type of resource is financial resources: the ability to generate funds internally or to raise finance externally (either debt or equity). While Tata is a major company in India with ample resources of its own, the two companies combined have the ability to raise ample finance to grow their new venture together. 

Mark as [2+2]. Award [1] for demonstrating an understanding of each of the three terms: human, physical, and financial resources, up to [2]. Award an additional [1] each for adequate explanation and application to the stimulus, up to [2]. Maximum award: [4].

1.2 Types of Business Entities

Sole Trader

Features:

• Owns and runs the business.  

• Makes decisions swiftly, often without consulting others.  

• Sole traders have expertise in their specific business

• Geographically close to the customer usually

• Privacy and limited accountability of finance, no need for records to be public

Advantages:

• Registration of the business is relatively quick and easy

• Sole traders face less paperwork compared to larger business structures

• Control over important decisions

• May have more personal relationships with customers

Disadvantages:

• Sole traders are likely to face high financial risk due to existing expenses in addition to business liabilities

• Sole traders also face high failure rates due to competition and the difficulty of securing finance

• Competition against established businesses is tough, making it difficult for sole traders to secure finance and capital

• Lack of continuity if a person were to die or become incapacitated

• May have ineffectiveness in planning decisions

Partnerships

Features:

• Partners make joint business decisions

• Owned, controlled, and managed by more than one person

• May have unlimited liability even if only own 10% of the business

• May have sleeping partners who only finance the business and receive equity

• Profits based on equity

• Partnership agreements are written including responsibilities, financing, division of profits, liabilities and procedures

Advantages:

• Shared responsibility allows for more efficient management due to the division of labor and skills

• Partnerships have more capital than sole traders, allowing for easier expansion of the business including more access to loans due to less risk

• More chance of continuity compared to Sole Traders

Disadvantages:

• Disputes may arise between partners, especially if there is no clear agreement in place in which each partner may have unlimited liability for debts and actions of other partners

• Shared profits can lead to conflicts among partners

• Partnerships have less access to equity compared to corporations with shared profits among partners

• No individual control

Companies (Corporations)

Features:

• Publicly held companies offer shares to the public, while private companies sell shares to a limited number of investors

• Companies can raise more capital by selling shares

• Limited liability tied to investment of shareholders

• Shareholders may own but don’t run the company

• Legal document are of public records including Memorandum Association and Article of association (company internal regulation)

• Has audited reports and general meetings with high degree of accountability

• Independent of shareholders meaning high stability and continuity of business

Advantages:

• Companies have more access to finance due to public or private ownership having less risks giving access to loans etc

• Risk is shared among shareholders, reducing individual risk in which only liable for shares bought

• The business continues even when ownership changes

Disadvantages:

• Extensive legal requirements compared to partnerships or sole traders

• The cost of raising equity and finance is higher

• Financial/operations information must be made public, leading to a loss of privacy giving information to competitors about operations

• Shareholders' wishes may conflict with management's decisions

• Selling shares does not guarantee raised finances

• Risk of dilution of shares leading to partial or entire loss of control over business

• No control over stock market meaning changes in value of company could be due to external factors

Social Enterprises

Form of business with a social purpose to improve human, social or environmental wellbeing with social aim taking priority over profits and other goals.

For-Profit Social Enterprises

Features:

• For-profit social enterprises are businesses that seek to generate profits while also achieving a social or environmental mission

• Surpluses are reinvested into the social cause or the business itself to enhance its impact

• Private sector for profits are in the form of sole traders, partnership or companies and may bid for government contracts

• Common services are usually related to cycling

Cooperatives

Features

•  Cooperatives are structured with equal ownership among members, where profits are shared equally or reinvested into the cooperative

•  Decision-making in cooperatives is democratic, with all members having a say

• Collaboration between business and government in recognizing the needs being met

• Decision making is more consultative and transparent

Advantages:

• A favorable legal status where legal structure limits liability, accountable to shareholders with business interest

• Cooperatives foster a sense of community among members and provide mutual support.  

• Due to their collective nature, cooperatives often have better negotiation power and can secure better prices

• Highly motivated employees and stakeholders with common purpose reporting high satisfaction due to sense of purpose and belief of making a social contribution

Disadvantages

• Cooperatives may find it difficult to raise capital due to their shared ownership structure

• It may not be sufficient in long term or in the case of an economic recession  as the business expands and need more profits 

• Decision-making can be slow, as it requires consensus among all member

Non-Profit Social Enterprises

Features:

• Do not intend to make any profit

• Surplus reinvested to advance social purpose (total revenue - total costs)

Businesses: 

• Ashoka: Social Entrepreneur Support, provides funding, networking and mentorship to individuals with innovative ideas for social change

• Fairtrade: Fair Trade Certification, promotes sustainable livelihoods for producers in developing countries by setting social, economic, and environmental standards for production of various products. Certifies producer compensation and treatment of labor, gives better market access and promotes environmental sustainability. Help raise consumer awareness 

Non-Governmental Organizations (NGOs)

Features:

• NGOs typically operate on a non-profit basis, relying on donations, grants, and fundraising efforts

• They address a wide range of issues, from local community development to global humanitarian aid

Businesses:

• Grameen Bank: In Microfinance, provide small loans (microcredit) to impoverished people without requiring collateral. Promotes Social and economic development, aligns with Corporate Social Responsibility (CSR) by having ethical lending

• TOMS Shoe: Footwear, for every pair of shoes sold, a pair is donated to a child in need also expanded to products like eyewear and clean water initiatives. Uses a for-profit business to address social issues and measurable by sales

• The Body Shop: Cosmetics, has ethical business practices and environmental sustainability. Focuses on sourcing sustainable ingredients and looking after wellbeing of workers 

Charities

Features:

• Specific form of NGO providing relief and helping those who can’t help themselves with operations in private sector (usually)

• Exempt from taxes

Advantages:

• Help people in need

• Can bring a philanthropic spirit in which people feel good about themselves making the community a better place to live

• Provide information by individuals working in local and distant problems helping make informed decisions

Disadvantages:

• Intense lobbying leads to socially undesirable goods which can affect legislation and legal structure of countries etc

• Have a passion or zeal that serves ill to the organization in the case of going too extreme with their actions

• Funding relies on donations which is problematic in a situation where there is economic recession

Practice/Homework

1. Define the Term “Partnership”

A business formed by two or more people who share ownership, responsibilities including liability of business

2. Outline two possible benefits to Larry Page and Sergey Brin of starting Google as a partnership.

More perspective: Both can find cons in the other’s ideas allowing them to have better decision making due to the diverse and different backgrounds also leading to innovative solutions

Allows both individuals to contribute their different skill sets in the business where one might be skilled in a field of finance while the others may be more skilled in legal

3. Analyze two possible problems Larry Page and Sergey Brin might encounter by starting Google as a partnership.

Unlimited liability; If something happens to the business then it affects their finance as well as personal assets since both partners have unlimited liability. If Google has financial debts, then personal assets may be at risk if failure to pay off the debts.

Dilution: Possible dilution/less control of the company due to new issuance of shares in companies. This scenario might also happen as the business grows and new partners or shareholders come in leading to less control of the business and a different direction in the company then originally intended.

4. Discuss the advantages and disadvantages to google of its conversion to a public limited company in 2004.

Advantages:

By becoming a public limited company, significant capital could be raised by the issuance of shares to the public, funds could be used for expansion, research and development, and other growth opportunities

Listed on stock exchanges increases company’s credibility and visibility making it easier to expand the company and gain trust of customers and market

Disadvantages:

Public companies need to meet short term financial targets which can prioritize initial profits over long term growth and stability

More shareholders and a board of directors having needs to be fulfilled which could restrict freedom of company direction

1.4 Stakeholders

Definitions

Shareholders are individuals who own shares in business making them part owners of the organization, they appoint directors to run the business on a day to day basis

Stakeholders are individuals or groups concerned or interested in the business

Stakeholder concept

The view that businesses and their managers have responsibilities to a wide range of groups, not just the shareholders.

Internal and external stakeholders

• Primary stakeholders are directly affected or affecting the business

• Secondary stakeholders have an indirect impact or relationship with the organization

• Internal stakeholders are individuals or groups who work with the business

• External stakeholders are individuals or groups outside the business

Internal (people inside the business)

1. Staff

2. Managers

3. Owners/Shareholders

External (people outside the business)

1. Customers/Consumers

2. Competitors

3. Suppliers

4. Community

5. Banks/Investors

6. Government

7. Pressure groups/special interest groups

Sustainable profit

3.7 Cash Flow

Difference of Cash Flow and Profit

Cash Flow is the money that flows in and out of a business over a period of time. Cash inflows are the money received by a business over a period of time while cash outflows are the money paid over a period of time. It is linked to lack of finance, legalities, SWOT and external shareholders.

Key indicator of ability to meet financial obligations.

Profit = Total Revenue - Total Costs. It is an indicator of financial success in the business.

Profit and Cash Flow are different in that use of cash or credit count as sales revenue after expenses making it a profit. If most purchases are credit then cash flow is different from profit.

Profitable but little to no cash caused by:

• Poor collections of funds from long credit periods.

• Paying suppliers early leaving no cash for operations.

• Purchasing capital or non-current assets at same time.

• Overtrading - Purchasing excessive stock with cash eventually tied in the business.

• Servicing loans with cash.

• Positive cash flow but unprofitable:

• Sourcing cash from bank loans.

• Gaining cash from selling fixed assets.

• Obtaining cash from shareholder funds.

Cash Flow Forecasts and Cash Flow Statement

Future prediction of cash inflows and outflows over a period of time. A financial document that shows expected month-by-month receipts and payments. Cash Flow statement is based on existing past data.

Constructing Cash Flow Forecasts

• Opening Cash Balance - Cash that business starts with every month or trading year

• Total Cash Inflows - Sum of cash inflows during a particular month, come from sales revenue, debtors, loans, interest received, sale of assets, rental income, etc

• Total Cash Outflows - Sum of cash outflows during a particular month, include rent, wages, purchase of stocks, tax, creditors, advertising, interest payments, dividends, etc

• Net Cash Flow - Difference between total cash inflow and outflow

• Closing Cash Balance - Estimated cash available at the end of month. Found by adding net cash flow to opening balance of same month

Benefits of Cash Flow Forecasts

• Useful planning document for starting a business as it helps make predictions for future performance

• Provides support cases for businesses intending on applying for funding from financial institutions, enables banks to check solvency. Lenders to repay debt/default and credit worthiness

• Helps managers identify in advance periods of need for cash

• Helps manage cash flow by making comparisons between predicted and actual identifying and addressing problems

Relationship between investment, profit and cash flow:

Investment refers to the act/state of investing resources, usually money financing of business purchasing assets with expectation of future earnings and asset appreciation. Profit is the financial surplus after revenue - costs. Cash flow is the money moving in and out of business.

Working Capital

Working capital (sometimes referred to as net current assets or circulating capital) refers to cash or other liquid assets available to an organization for its daily operations. Working capital = Current assets - Current liabilities

Current Assets

Short term assets belongings of an organization that can be relatively easy to convert into cash. Ex. cash, stocks (inventory), and debtors:

• Cash refers to the money an organization has either “in hand” (at its premises) and/or “at bank”. It is the most liquid of current assets and easily accessible to business

• Stock (also known as inventory) refers to the volume of goods that a business has available for sale, per time period. A firm's inventory is intended to be sold as quickly as possible, thereby generating cash for the business.

• Debtors are a type of current assets, referring to individual or business customers that owe money to the organization because they have bought goods or services on trade credit. The usual trade credit period is between 30 and 60 days.

Current liabilities

Short-term debts of a business, which need to be repaid within twelve months of the balance sheet date. Typical examples include bank overdrafts, trade creditors, and short-term loans from financiers:

• Bank overdrafts (or just overdrafts) allow customers to temporarily take out more money than is available in their bank account. This banking service enables pre-approved customers are used for very short term purposes and typically repaid within a few months in order to avoid high interest charges.

• Trade creditors are the firm’s suppliers who have yet to be paid, as trade credit enables the business to buy now but pay later, typically within 30 to 60 days.

• Short-term loans are advances (loans) from a financial lender, such as a bank, that need to be repaid within 12 months of the balance sheet date.

Working Capital Cycle

The working capital cycle of a business refers to the duration between the organization paying for the production costs of a good or service and it receiving the cash from customers purchasing the product.

Features:

• Very short (quick) as they receive cash immediately from their sale

• Positive working capital generally shows that a business is able to pay off its short-term liabilities very quickly. 

• Or longer (slow) due to the long production process and/or the high price of their products as they often pay using installments and credit terms

• Negative working capital generally indicates the business is unable to pay off its short-term liabilities quickly and often have to  (borrow money) such as short-term finance options, such as bank overdrafts and short-term loans, 

Liquidity/liquid assets

• Liquidity means extent of which organizations can convert assets (items of monetary value) into cash

• Liquid assets can be converted into cash quickly without negatively impacting the market value (cash including deposits), debtors, stock (inventory)

• Illiquid assets are items of monetary value that cannot be converted into cash quickly including property, plant (production facilities) and equipment

Liquidity Position/Ratios

Indicates extent of sufficient liquidity to continue operations. Good liquidity position means the business can avoid bankruptcy (business closure) as the organization has sufficient liquidity to continue operating. A business in a poor liquidity position may struggle to cover its current liabilities causing bankruptcy liquidity position of a business is important as it shows its ability to repay short-term liabilities without having to rely on external sources of finance.

Current ratio - is a short-term liquidity ratio used to calculate the ability of an organization to meet its short-term debts (within the next twelve months of the balance sheet date). It calculates the value of an organization’s liquid assets relative to its short-term liabilities.

Acid test ratio - (also known as the quick ratio) is a short-term liquidity ratio used to measure an organization’s ability to pay its short-term debts (within the next twelve months of the balance sheet date), without the need to sell any stock (inventories). Stocks are ignored from the calculation as some inventories are not highly liquid, such as work-in-progress or very expensive finished goods sold in niche markets. This makes the stock difficult to sell or convert into cash in a short period of time.

Crisis illiquidity - Measure the extent to which an organization can pay off its short-term debts using its current (liquid) assets. Must manage their liquidity position in order to prevent a liquidity crisis (the situation that arises when the organization is unable to pay its short-term debts)

Strategies for Dealing with Cash Flow Problems

Dealing with Liquidity problems (inflows):

• Tighter credit control

• Cash payments only

• Change pricing policy

• Improved product portfolio

• Improved marketing planning

Dealing with Liquidity problems (Outflows)

• Seek preferential credit terms

• Seek alternative suppliers

• Better stock control

• Reduce expenses

Reducing Cash Outflows:

• Negotiate with suppliers/creditors to delay payment having working term capital for short term needs. May be time-consuming and could affect future relationships

• Delaying fixed asset purchases stalling cash in the business. If asset is outdated, may have decreased efficiency long term higher costs

• Can decrease specific expenses not affecting production such as advertising, although may reduce future demand of products

• Sourcing cheaper suppliers reduces cost of materials. A risk may be decrease in quality of product affecting customer relationships

Improving Cash Inflow:

• Raising prices of products that have few substitutes, loyal customers are not sensitive to increases in price

• Insist on cash sales when buying goods avoiding delayed payment. This method may lose customers who rely on credit for performance

• Reducing credit period however customers may be unhappy leading to seeking of alternative providers or offering discounts encouraging debtors to pay early but receive less cash

• Reduce prices of products that have a high degree of competition attracting customers from competitors

• Improved marketing strategies attracting customers and raising brand awareness

• Diversify product offering accessing new markets of goods although with higher cost

Additional Finance Sources

• Sale of Assets - Selling obsolete fixed assets to generate cash. If needed assets sold, could reduce production

• Bank Overdraft - Short-term loan that allows firms to overdraw from their account. Helps during cash setbacks like negative cash flow or  when it has a negative closing balance but high interest rates harming cash flow

• External sources- Securing finance from sponsorships, donations or gifts boosting cash inflow but not easily accessible

• Selling Shares - Shares sold to raise finance, not really available to sole traders and partnership

• Sale/Leaseback - Assets sold to generate cash and then leased back for production. Leasing is more costly in long term and also leases as collateral assets

Limitations of Cash Flow Forecasts:

• Unexpected changes in the economy

• Poor market research can lead to negatively affecting cash sales lowering inflow

• Difficulty in predicting competitor behavior due to changes in strategy affecting strategic business

• Equipment Failure needs difficult to predict

• Demotivated employees leading to less productivity in sales and cash inflow

Practice/Homework

Define the term working capital cycle. [2]

Attempt: Process representing time for investment of raw materials to receive cash from sales. Working capital cycle refers to the duration of the costs of business production (paying for stock) of goods/services and the receiving of cash from customers.

Distinguish between current assets and current liabilities. [4]

Attempt: Current assets are the short term assets that are easy to liquidate into cash within 12 months. Current liabilities are debts of business that need to be paid within 12 months. Examples for current assets include stock, cash and debtors. Examples of current liabilities include bank overdrafts, short term loans and trade creditors which have not been paid yet.

(a) State two advantages of operating as a partnership. [2]

• More capital as there are multiple owners which provides more capital in comparison to being a sole trader

• Different skill set combining together bringing their different skills which leads to better decision making and innovation

(b) Prepare a cash flow forecast for BT for the first three months of operation. [6]

(c) Explain one limitation of cash flow forecasts for BT. [2]

Since it is a startup, there is a lot of instability and uncertainty with unexpected costs and incorrect assumptions happening. This can result from factors like changes in economy, customer preferences  and poor market research about types of goods and services that are popular. Their cash flow forecasts also might be inaccurate as they both have little experience in finances of business as their expertise is about bicycles and it would be difficult to hire anyone at this moment in time due to finances and low opportunities.