Managing Finance Unit 2.3.3 Flashcards

Question

**35 liquidity - distinction between cash and profit** *cash*

Answer 1

Cash refers to the actual money the business has available right now — in hand or in the bank. It includes all incoming and outgoing money, whether it’s from sales, loans, or investments. Cash is tracked through the cash flow statement. It’s important for paying bills, wages, suppliers, etc. A business can survive without profit for a while, but not without cash.

Answer 2

📈 Profit Is About What You Earn 💰 Cash Is About What You Actually Receive or Spend At the end of a trading year, your profit and cash balance will probably be different. Here's why: 🧾 1. Selling on Credit A business sells goods worth £200,000, and it costs them £160,000 to make and sell those goods. So, they made £40,000 profit. But if some customers haven't paid yet (say £12,000 is still unpaid), then the cash received is only £28,000. 👉 Profit = £40,000, but cash = £28,000 🕒 2. Cash from Last Year’s Sales Sometimes, businesses get paid this year for sales they made last year. This increases cash now, but it doesn't count as profit this year, because the profit was already recorded last year. 🛍️ 3. Buying Now, Paying Later If a business buys materials but doesn't pay until next year, the cost is included in this year’s profit calculation, but the cash hasn’t been spent yet. 👉 Profit goes down, but cash stays higher (for now). 🧑‍💼 4. Owner Adds Money to the Business If the business owner puts in more money, the cash increases, but this doesn’t count as profit — it’s called capital, not income. 🏦 5. Borrowing Money (Loans) Borrowing from the bank means more cash, but again, it doesn’t increase profit, because it's not earned income. 🏢 6. Buying Equipment (Fixed Assets) If the business buys a van or a machine, it spends cash, but it doesn’t count as a cost in the profit and loss account straight away. 👉 So, cash goes down, but profit stays the same. 🚗 7. Selling Equipment If the business sells a fixed asset (like a van), it gets cash, but this only affects profit if the van is sold for more or less than it’s worth. 👉 The cash increases, but profit might not change much. 🧾 8. Opening Cash Balance Matters Too If the business started the year with £23,000 in the bank, then even before making any profit, it already has that much cash. 👉 That money is not profit, but it’s still cash the business has.

Answer 3

A Statement of Financial Position (also called a Balance Sheet) is a financial document that shows the value of everything a business owns and owes at a specific point in time — usually at the end of the financial year. You can think of it like a snapshot of a business’s finances on a single day. It answers questions like: What does the business own? How much does it owe? How much has been invested by the owners? 📌 Why is it Important? It shows the financial health of the business. It helps investors, banks, and owners see if the business is financially stable. It’s used to track how the business has grown or changed over time. It’s useful when applying for loans, selling the business, or making big decisions. It Includes Three Main Parts: assets, liabilities and capital. **🧮 The Key Formula:** Assets = Capital + Liabilities This means: Everything the business owns (assets) has been paid for by either: Money from the owners (capital), or Borrowed money (liabilities). 🔍 Example: If a business has: Capital = £5 million Liabilities = £2.6 million Then its assets must be: £5 million + £2.6 million = £7.6 million That’s the total value of everything the business owns.

Answer 4

These are the things the business owns and uses to run. Examples: buildings, machines, stock, vehicles, cash. Assets help the business produce goods or offer services.

Answer 5

These are the things the business owes — its debts. Examples: loans, overdrafts, unpaid bills. Can be short-term (like bills due soon) or long-term (like mortgages).

Answer 6

This is the money that the owners have put into the business. It helps fund the business, just like loans do. Used to help buy assets and grow the company.

Answer 7

🧾 How a Statement of Financial Position (Balance Sheet) is Presented Different types of businesses may lay out their Statement of Financial Position slightly differently. For example, a limited company may present its statement differently from a sole trader. But the basic structure is usually quite similar. 📌 What It Looks Like: The information is usually shown in a vertical list (top to bottom). Assets (what the business owns) are listed at the top. Liabilities (what the business owes) and equity (the owners' investment) are shown below the assets.

Answer 8

1. Non-Current Assets (also known as Fixed Assets) Non-current assets are long-term resources that a business intends to use over a period exceeding one year. These assets are not readily convertible into cash during the normal course of business operations. They are essential for supporting the long-term operations of the company and include both tangible and intangible assets. Examples of non-current assets include: Land and buildings Plant and machinery Tools and equipment Vehicles Fixtures and fittings Intangible assets such as: Brand names Franchising agreements Patents and trademarks Customer databases These assets are often referred to as fixed assets because they are not intended for resale and are used repeatedly in the production or delivery of goods and services. 1. Long-term Assets (Fixed Assets) These are assets intended for use over an extended period (typically more than one year). They are not easily converted into cash and include items such as property, equipment, vehicles, and intangible assets like brand names or patents. Advantages: Operational Support: Long-term assets are essential for the day-to-day functioning of many businesses, especially those involved in production or service delivery. Potential for Capital Appreciation: Certain long-term assets, such as land or property, may increase in value over time, contributing positively to the business’s financial position. Stability and Predictability: These assets provide a stable foundation for long-term planning and investment, as they are less volatile than short-term assets. Disadvantages: High Initial Investment: The purchase of long-term assets typically requires significant capital expenditure, which can strain a business's financial resources. Depreciation: Most long-term assets, especially physical ones, lose value over time due to wear and tear or obsolescence, reducing their future resale value. Ongoing Costs: Maintenance, repairs, and insurance associated with long-term assets can lead to substantial recurring expenses. 2. Current Assets Current assets are short-term resources that are expected to be converted into cash, sold, or consumed within a single financial year (typically within 12 months). These assets are considered liquid because they can be quickly and easily converted into cash to meet the business's immediate financial obligations. Examples of current assets include: Inventory (stock): This includes raw materials, components, work-in-progress, and finished goods held for resale. Trade and other receivables: These represent amounts owed to the business, such as: Debtors – customers who have purchased goods or services on credit. Prepayments – expenses paid in advance (e.g., insurance or rent paid before the service period begins). Cash and cash equivalents: These refer to physical cash on hand, as well as money held in business bank accounts. 2. Current Assets Current assets are short-term resources expected to be converted into cash within one year. Examples include cash, accounts receivable, and inventories. Advantages: High Liquidity: Current assets can be quickly converted into cash, making them essential for meeting short-term financial obligations. Financial Flexibility: These assets provide the business with the ability to respond promptly to unexpected expenses or investment opportunities. Essential for Cash Flow: Effective management of current assets supports healthy cash flow, enabling the business to function smoothly on a daily basis. Disadvantages: Value Fluctuations: The value of some current assets, such as inventory or accounts receivable, can fluctuate due to market conditions or customer behaviour. Risk of Bad Debts: Money owed by customers (receivables) may not always be collected, which can lead to financial loss. Limited Long-term Contribution: Unlike fixed assets, current assets do not typically contribute to long-term value generation or strategic growth. Key Distinction: Liquidity Non-current assets are less liquid and are used to generate income over the long term. Current assets are highly liquid, meaning they can be quickly turned into cash, which is essential for day-to-day operations and managing short-term liabilities.

Answer 9

Liabilities refer to the financial obligations or debts that a business is required to settle. These represent amounts owed by the business to external parties, such as lenders, suppliers, or tax authorities. Liabilities are generally classified into two categories based on the time frame within which they are expected to be repaid: current liabilities and non-current liabilities. **Current Liabilities** Current liabilities are short-term financial obligations that the business must repay within 12 months of the reporting date. These are typically settled using current assets, such as cash or receivables. *Examples of current liabilities include:* Short-term loans Bank overdrafts Trade payables (amounts owed to suppliers or creditors) Accrued expenses Tax liabilities (such as VAT, income tax, or national insurance contributions) **✅ Advantages of Current Liabilities:** Quick Access to Funds: Short-term borrowing (e.g., overdrafts or supplier credit) provides fast access to finance for immediate needs. Lower Interest Costs (in some cases): Short-term loans can sometimes have lower overall interest compared to long-term debts. Flexibility: These liabilities can be adjusted more frequently depending on cash flow needs and trading activity. No Long-Term Commitment: The business is not tied into long-term repayment plans. **❌ Disadvantages of Current Liabilities:** Cash Flow Pressure: Repayments are due quickly, which can strain cash flow if not well managed. Short-Term Risk: Failing to pay current liabilities on time can damage supplier relationships and credit ratings. Limited Borrowing Amounts: Short-term loans usually provide less capital than long-term loans, which may not be suitable for major investments.

Answer 10

**Non-Current Liabilities** Non-current liabilities are long-term debts or obligations that are not due for repayment within the next 12 months. These are typically associated with long-term financing arrangements or future commitments. *Examples of non-current liabilities include:* Bank loans repayable after more than one year Mortgages Pension obligations Long-term lease liabilities **✅ Advantages of Non-Current Liabilities:** Supports Long-Term Growth: Ideal for financing large investments such as machinery, buildings, or expansion projects. Improved Cash Flow Management: Repayments are spread over a longer period, which can ease cash flow pressures in the short term. Stable Financing: Non-current liabilities provide a predictable source of capital, helping with long-term financial planning. **❌ Disadvantages of Non-Current Liabilities** Higher Total Interest Costs: Although interest rates may be lower, long repayment periods mean the business may end up paying more interest overall. Long-Term Financial Commitment: Once entered, the business is committed to repayments over several years, even if circumstances change. May Require Security or Collateral: Lenders often require the business to offer assets (like property) as security, which can increase financial risk.

Answer 11

To find out how much the business is really worth, you use this simple formula: **Net Assets = Total Assets – Total Liabilities** This gives you the true value of the business, after subtracting what it owes from what it owns.

Answer 12

🧑‍💼 4. Shareholders’ Equity – What the Owners Have Invested This is the final section of the statement, and it shows what belongs to the owners or shareholders after all debts are paid. It's also called equity, and it matches the net assets total (because it shows who owns what's left). It usually includes: Share capital – the money originally put into the business by the owners. Retained earnings – the profit the business has made and kept over time, instead of paying it out. Full: Shareholders’ equity represents the residual interest in the assets of a business after all liabilities have been deducted. It is the section of the financial statement that reflects what belongs to the owners or shareholders of the business once all external debts and obligations have been settled. This section is also referred to as equity or owner’s equity, and it corresponds with the total net assets of the business. In essence, it indicates who owns the remaining value of the company. Shareholders’ equity typically consists of the following key components: 🔹 Share Capital This refers to the initial and any additional investment made into the business by its owners or shareholders through the purchase of shares. 🔹 Retained Earnings These are the cumulative profits that the business has generated and chosen to retain for reinvestment or future use, rather than distribute to shareholders as dividends.

Answer 13

1️⃣ Total Assets This tells you the total value of everything the business owns. Formula: Total Assets = Non-current Assets + Current Assets 💡 Example: If a business has: Non-current assets = £221.7 million Current assets = £42.5 million Then: Total Assets = £221.7m + £42.5m = £264.2 million

Answer 14

2️⃣ Total Liabilities This tells you the total amount the business owes. Formula: Total Liabilities = Current Liabilities + Non-current Liabilities 💡 Example: If the business has: Current liabilities = £36.7 million Non-current liabilities = £32.3 million Then: Total Liabilities = £36.7m + £32.3m = £69 million

Answer 15

3️⃣ Net Assets This is the value of the business after taking away what it owes. Think of it as: “What the business owns minus what it owes.” Formula: Net Assets = Total Assets − Total Liabilities 💡 Example: Total assets = £264.2 million Total liabilities = £69 million Then: Net Assets = £264.2m − £69m = £195.2 million

Answer 16

4️⃣ Total Equity (Shareholders' Equity) This shows how much of the business belongs to the owners or shareholders. Formula: Total Equity = Share Capital + Retained Earnings 💡 Example: Share capital = £25 million Retained earnings = £170.2 million Then: Total Equity = £25m + £170.2m = £195.2 million ✅ Important Note: Net Assets will always equal Total Equity In our example: Net Assets = £195.2 million Total Equity = £195.2 million 🎯 That’s because everything the business owns (its assets) has been funded either by: Borrowing (liabilities), or Money from the owners (equity).

Answer 17

Liquidity means how easily something a business owns can be turned into cash. The more quickly something can be turned into cash, the more liquid it is. Cash itself is completely liquid. Some assets take longer to turn into cash, so they are less liquid. Full: Liquidity is about how quickly and easily something a business owns (called an asset) can be turned into cash. Some assets, like buildings, machines, or tools, are not very liquid. These are called non-current assets, and they can take a long time to sell—sometimes even months.

Answer 18

Other assets, called current assets, are more liquid because they are expected to be turned into cash within a year. But even among current assets, some are more liquid than others: Cash is the most liquid asset – it’s already in the form the business needs. Trade receivables (money customers owe) are also quite liquid, because most customers are expected to pay within 90 days. Inventories (like products waiting to be sold) are the least liquid current asset. This is because there’s no guarantee everything will be sold quickly. So, liquidity helps a business know how easily it can access cash to pay bills, wages, or other short-term costs. The more liquid the assets, the easier it is for the business to stay financially healthy.

Answer 19

A business needs enough liquid resources to pay its short-term bills and debts. If it can’t do this, it could run into serious financial trouble — or even go out of business. Two main formulas (called ratios) help measure liquidity: **a Current Ratio Test and anAcid Test Ratio**

Answer 20

The current ratio is a key financial metric used to assess a business’s liquidity position—that is, its ability to meet short-term obligations using its short-term (current) assets. It compares the value of current assets (such as cash, inventory, and trade receivables) to current liabilities (such as trade payables, short-term loans, and other obligations due within 12 months). **🧮 Formula:** Current Ratio = Current Assets / Current Liabilities 📊 Interpreting the Ratio: A current ratio between 1.5:1 and 2:1 is generally considered financially healthy. It suggests that the business has sufficient liquid resources to meet its short-term debts without putting operations at risk. A current ratio below 1.5:1 may indicate liquidity concerns, such as: Insufficient working capital to support day-to-day operations Overborrowing, or Overtrading, where a business is expanding too rapidly without the financial resources to sustain that growth A current ratio above 2:1 might indicate that the business is not using its assets efficiently. Excessive amounts of money could be tied up in inventory or receivables, which may not be generating returns. 🛍 Industry Variation – Retail Sector Example: In certain industries, particularly retail, lower current ratios (e.g., 1:1 or below) may still be considered acceptable. This is because such businesses typically: Have fast inventory turnover Operate with strong and frequent cash flows, and Do not require large reserves of liquid assets to maintain daily operations

Answer 21

This is a stricter test of liquidity. It removes inventory (stock) from current assets because stock can take time to sell and might lose value. Acid Test Ratio = (Current Assets – Inventory) ÷ Current Liabilities If this ratio is less than 1:1, it means the business might not be able to pay its short-term debts without selling stock—this could be risky. But again, businesses like retailers that have fast sales may be fine even with a lower acid test ratio.

Answer 22

Liquidity means having enough cash (or things that can quickly be turned into cash) to pay bills. If a business is short on cash, it needs to act fast to stay alive. The goal becomes survival—not profit. Here are easy ways a business can get more cash or save money to fix liquidity problems: sell assets or use leasebacks, delay paying suppliers, reduce inventory (just-in-time method) and factoring.

Answer 23

💰 Selling Assets to Get Cash Businesses sometimes need quick money—maybe to pay bills, invest, or survive a tough time. One way to get that money is by selling things they own. What kind of things can they sell? Physical assets – things you can touch, like: Cars, trucks, or delivery vans Office buildings or warehouses Machines used in production Financial assets – like: Shares (ownership in other companies) Bonds (loans to governments or other businesses) They can also sell part of their company. ✅ Example: In 2017, a Dutch construction company called Heijmans needed money. So, it sold three of its Belgian businesses to another company (BESIX) and got over €40 million in cash. 🔁 Sale and Leaseback – Keep Using the Asset Sometimes, a business doesn’t want to lose the asset (like a building or machine), but still needs the cash. Here’s what they do: Sell the asset to a finance company. Rent (lease) it back from them. So now they have the money from the sale, but they still get to use the asset—they just have to pay rent for it now. ✅ Example: Imagine a bakery owns a delivery van worth €10,000. They sell it to a finance company and get the €10,000 in cash. But they lease (rent) the van back so they can still deliver bread every day. It’s like selling your car but still being allowed to drive it by paying a monthly fee. ⚠️ What to watch out for: Takes time – You need to find a buyer or make a lease agreement. Can cost more long-term – Renting back the asset can get expensive over the years.

Answer 24

✅ 2. Delay Paying Suppliers (Extend Credit Terms) Ask suppliers for more time to pay bills—like 60 days instead of 30. This means the business keeps its cash for longer. Example: Instead of paying a £5,000 bill now, the business pays in 2 months. Advantages: ✔ Keeps cash in the business longer ✔ No need to borrow money ✔ Simple and quick to arrange Disadvantages: ✘ Suppliers may say no ✘ If overused, suppliers might stop delivering goods ✘ Could damage relationships with suppliers

Answer 25

✅ 3. Factoring (Selling Invoices) When customers owe you money, you can sell those unpaid invoices to a finance company (called a “factor”). The factor gives you most of the money right away (usually around 80%), and gives you the rest later (minus a fee) when the customer pays. Example: You send a £10,000 invoice to a customer. A factor gives you £8,000 now, and the rest later. Advantages: ✔ Get cash immediately ✔ Helps manage cash flow ✔ You don’t have to wait months for customers to pay Disadvantages: ✘ You pay a fee (so you don’t get the full amount) ✘ Could become expensive over time ✘ Customers might prefer dealing directly with you

Answer 26

A business can improve its cash flow by keeping less stock (inventory). Why? Because stock ties up money—it just sits there and can’t be used to pay bills. 🧠 Think of it like this: If a business has £10,000 worth of materials sitting in a warehouse, that’s £10,000 it can’t use to pay wages or rent. That’s money “locked up.” 💡 What is Just-in-Time (JIT)? JIT is a smart way to manage stock. Instead of keeping lots of materials or products in storage, the business: Only orders materials when they’re needed Only makes products when a customer places an order That’s why it’s called “Just-in-Time” — things arrive or get made right when they’re needed, not earlier. Advantages: ✔ Frees up cash (less money stuck in stock) ✔ Lower storage costs ✔ Reduces waste (especially for perishable items) Disadvantages: ✘ Risk of running out of stock ✘ Might delay production or sales if deliveries are late ✘ Not ideal if suppliers are unreliable ✘ You might miss out on bulk discounts for buying in large quantities 📦 Inventory and Just-in-Time (JIT)

Answer 27

Think of working capital as the money a business has available to run day-to-day operations—like paying employees, buying materials, and keeping the lights on. **🔢 The Simple Formula** *Working Capital = Current Assets – Current Liabilities* Let’s explain those two terms first: ✅ Current Assets = What the business owns and can use soon These are things the business will turn into cash within a year: Cash in the bank Stock/inventory (items to sell or use in production) Money owed by customers (called “debtors”) 📦 Example: Imagine you run a small coffee shop: £1,000 cash in the register £2,000 worth of coffee, milk, and cups in storage £3,000 that customers owe you (maybe a company that ordered catering) So, your current assets = £6,000 ❌ Current Liabilities = What the business owes soon These are bills or debts that must be paid within a year: Bills from suppliers (coffee bean supplier, milk delivery) Wages you owe your employees Taxes you must pay soon Short-term loans or overdrafts 📄 Example: Let’s say: You owe £2,000 to suppliers £1,000 to employees £1,000 in taxes So, your current liabilities = £4,000 ✅ Now Let’s Calculate Working Capital Working Capital = Current Assets – Current Liabilities = £6,000 – £4,000 = £2,000 So, you have £2,000 left over to run your shop, after paying your short-term bills. That’s your working capital.

Answer 28

Working capital is important because it shows if the business can keep running without running out of money. If working capital is: Positive (assets > liabilities): ✔ You have enough money to run the business Zero: 😬 You break even—just enough to cover bills Negative (liabilities > assets): ❌ You don’t have enough money to pay bills. You’re in trouble. 🏃‍♂️ Day-to-Day Business Example Imagine you're running a clothing store. You need working capital to: Buy new clothes to sell Pay your employees Pay electricity and rent Handle returns or slow weeks If your working capital is too low: You can’t buy new stock You can’t pay wages Customers get upset because you’re out of items Business could fail If you have too much working capital: You have too much cash or too much stock just sitting there That money isn’t being used effectively You're missing out on growing or investing in the business

Answer 29

Managing working capital means making sure the business: Has enough money to pay its short-term bills Doesn’t have too much money locked away in stock or unpaid invoices It’s about balancing how much the business owns and how much it owes to keep running smoothly.] 3 Factors That Affects Working Capital Management: size of business, debtors and creditors

Answer 30

1️⃣ Size of the Business The bigger the business, the more working capital it usually needs. Why? Because they have: More employees = more wages to pay More stock to hold = more sales needed More customers = more invoices and delayed payments 🧠 Example: A small coffee stall might need only £500 to buy supplies for the week. A large coffee chain (like Starbucks) needs thousands for ingredients, staff, rent, etc.—so it needs much more working capital.

Answer 31

**📦 2. Inventory (Stock) Levels** Not all businesses need the same amount of stock. The more inventory a business keeps: The more money it has tied up in that inventory (money spent on buying and storing it). The more space it needs to store it. The more working capital it needs. **✅ Low Inventory Business** Window cleaner: Just needs a ladder, bucket, and cleaning supplies. Doesn’t keep much in storage. Doesn’t need much money tied up in stock. ➡️ Low inventory level = Less working capital needed **✅ High Inventory Business** Retail store (e.g. clothing shop): Needs to have lots of shirts, pants, shoes, etc., in different sizes and colors. Needs money to buy all that stock ahead of time. Needs space to store it and staff to manage it. ➡️ High inventory level = More working capital needed So in general: 👉 The more inventory a business needs, the more working capital it needs.

Answer 32

Debtors = People or businesses that owe YOU money → Example: You sell something to a customer, but they’ll pay you in 30 days. That customer is your debtor. Creditors = People or businesses that YOU owe money to → Example: You buy materials from a supplier but you’ll pay them in 30 days. That supplier is your creditor. **🧮 How This Affects Working Capital** Working capital is the money a business has to run its daily operations. It’s based on: 👉 Current assets (like cash, stock, and money owed to you by customers) minus 👉 Current liabilities (like bills you still have to pay) **🧱 Example: A Builder (High Working Capital Needed)** A builder starts a project. They buy materials (on trade credit – meaning they’ll pay the supplier later). They work for weeks or months before they get paid by the client. 💡 So, they’ve spent money (or owe it) for a long time before any cash comes in. ➡️ The builder needs high working capital to keep things going during that time. **🛒 Example: A Supermarket (Negative Working Capital!)** Supermarkets are in a lucky position: They get stock from suppliers (like bread, milk, etc.). They don’t pay the supplier for 30 days. BUT — they sell the stock to customers within a few days. Customers pay in cash or by card immediately. ✅ So the supermarket: Has cash coming in fast, but Doesn’t have to pay bills for weeks. ➡️ This can lead to negative working capital: Their current liabilities (bills to pay) are higher than their current assets (cash, stock, and money owed to them). But that’s okay for them, because of their fast cash flow. **📏 What’s the “Textbook Rule”?** Most businesses can’t operate like supermarkets. They need a safe cushion — more assets than liabilities. **So the rule is:** Your current assets should be about twice your current liabilities. This gives you a current ratio of 1.5:1 to 2:1. (For every £1 you owe, you have £1.50–£2 in assets.)

Answer 33

A healthy business usually has 1.5 to 2 times more current assets than current liabilities. This is called the Current Ratio and should ideally be between 1.5:1 and 2:1.

Answer 34

Businesses need to have enough working capital to run smoothly. If they don’t, they can run into serious problems. **🚫 What happens if a business has too little working capital?** Not enough inventory (stock): If they don’t have enough raw materials, production could stop. If they don’t have enough finished products, they might not be able to deliver orders to customers on time. Not enough cash: The business might struggle to pay bills, rent, or wages on time. Too much debt (especially to suppliers): If the business owes a lot of money and can’t pay it back on time, it could hurt its relationships or even lead to legal trouble. **A business needs to:** Keep enough stock to meet demand, Have enough cash to pay bills, Not borrow too much from suppliers. Keeping the right balance helps the business stay healthy and avoid money problems.

Answer 35

💸 What If a Business Has Too Much Working Capital? It may mean the business has too much cash sitting around or too much stock not being sold 👎 This is bad because: Stock can go out of date or be stolen Cash earns little or no interest and could be better used to: Invest in growth Pay off debts Buy new equipment 📦 Real-Life Example: Two Coffee Shops Coffee Shop A Keeps 3 months’ worth of coffee beans in storage Takes 60 days to get paid by event customers Pays suppliers the same day Coffee Shop B Orders coffee every week (JIT) Gets paid immediately at the till Pays suppliers after 30 days ➡️ Coffee Shop A needs much more working capital to stay afloat. ➡️ Coffee Shop B runs more efficiently and ties up less money.

Answer 36

💰 What Is Cash and Why Does It Matter? Cash is the actual money a business has right now—either in the bank or as physical money (notes and coins). It’s the easiest kind of money to use. You can spend it immediately to: Pay bills Buy stock or supplies Pay employees 🔄 Is Cash the Same as Working Capital? Not exactly, but cash is part of working capital. Working capital includes: ✅ Cash (can be used right away) ❌ Stock/inventory (items waiting to be sold) ❌ Money owed by customers (called “debtors” – you can’t spend this until they pay) 💡 So even if a business has lots of stock or is waiting to get paid, it still needs real cash to keep going. ❗ Why Is Cash So Important? Even a successful business can run into trouble without cash. Cash is needed to: 👷 Pay staff 📦 Buy supplies and stock 🏢 Pay rent and bills If a business runs out of cash, it might stop operating—even if it’s making a profit on paper.

Answer 37

One way to measure how many businesses are failing is by looking at the global insolvency index. Insolvency means a business can’t pay its debts and may go bankrupt.

Answer 38

One way to measure how many businesses are failing is by looking at the global insolvency index. Insolvency means a business can’t pay its debts and may go bankrupt.

Answer 39

Sometimes a business fails because of problems within the business itself—not because of outside factors like the economy or competition. These are called internal causes. Cash is like fuel for a car — without it, the business stops running. Even profitable businesses can fail without proper cash management. To avoid this, a business needs to: Spend carefully, Plan ahead, Manage credit and debt wisely, Be ready for surprises, Keep track of where the money is going at all times.

Answer 40

**1. 🏗️ Spending Too Much on Fixed Assets** Fixed assets = big, expensive things like equipment, vehicles, or buildings. When a business is just starting, money is usually limited. If they spend too much on buying things like new machines or office space, they may run out of cash for everyday costs (like wages or stock). ✅ Better idea: Lease (rent) equipment instead of buying, so the business keeps more cash in hand. **2. 💳 Allowing Too Much Credit to Customers** Credit = letting customers buy now and pay later (like after 30 or 60 days). If a business gives too much time for payment, cash comes in slowly. Meanwhile, the business still has to pay its own bills — rent, staff, suppliers. If customers delay payment or don’t pay at all (bad debts), cash flow gets worse. ✅ Tip: Set clear payment terms and chase late payments quickly. **3. 💸 Overborrowing (Taking on Too Much Debt)** Some businesses borrow money to grow fast. But too much debt = high interest payments. Eventually, they may struggle to keep up with repayments and risk losing control of the business. ✅ Tip: Try to grow steadily. If money is needed, think about raising funds from investors (selling shares), not just loans. **4. 🌦️ Seasonal Sales (Ups and Downs During the Year)** Some businesses don’t earn money all year round. Example: A fruit farm makes most of its money during harvest time. But it still has to pay bills all year (equipment, staff, etc.). Without careful planning, they might run out of cash before their big sales come in. ✅ Tip: Use cash flow forecasting to plan ahead and manage quiet months better. **5. ⚠️ Unplanned or Emergency Costs (Unforeseen Expenditure)** Surprises happen. And they often cost money. Examples: Machines break down, A tax bill arrives, A supplier goes on strike, Customers don’t pay. New businesses are especially at risk if they don’t have savings or haven’t planned for emergencies. ✅ Tip: Always keep an emergency cash reserve if possible. **6. 🌍 External Factors Affecting Cash Flow** Even though this is an internal cash problem, sometimes it’s caused by external changes such as: A sudden drop in customer demand, New government rules (regulations), A recession or economic slowdown. ✅ These things aren’t in the business’s control, but they still hurt cash flow — so it’s important to stay aware of outside risks. **7. 📉 Poor Financial Management (Lack of Experience or Planning)** Sometimes business owners: Don’t track cash coming in and going out, Spend before money is actually received, Don’t prepare for upcoming bills or tax payments. ✅ Example: A company plans a big purchase thinking customers will pay soon — but they haven’t yet. Now the business has no cash and can’t pay its suppliers. ✅ Tip: Make regular cash flow forecasts (a plan showing when money will come in and go out), Keep accurate records, Monitor your finances regularly.

Answer 41

Sometimes businesses expect to sell more than they actually do. This is called overestimating sales, and it’s a big reason why some businesses fail. Here’s why it happens: It’s hard to predict the future. What customers want can change quickly. There’s a lot of data to look at, and it can be confusing or hard to interpret. Many business owners are naturally optimistic. They believe things will go well, so they guess sales will be higher than they really are. 😬 What Can Go Wrong If Sales Are Overestimated? If a business expects high sales and prepares too much: It might make too many products that don’t get sold. That means lots of money is spent, but not enough comes back in from customer purchases. This leads to cash flow problems — not enough money to pay bills or keep the business running. In serious cases, the business may run out of cash and shut down. ✅ Solution: How to Avoid This Problem Be realistic and prepared. Here’s how: Use conservative sales forecasts → Estimate sales on the low side, just to be safe. Test the market first → Sell a small amount of your product before producing more. This helps you see if people actually want it. Plan for different scenarios → Create 3 plans: Best case (high sales) Expected case (normal sales) Worst case (low sales) That way, you're ready no matter what happens. Keep costs flexible → Don’t spend too much upfront on stock, staff, or equipment. Start small and grow as demand increases. Review and update forecasts regularly → Don’t make a sales forecast and forget about it. Keep checking your actual sales and adjust your plans if needed. **💡 Simple Example:** A new bakery thinks it will sell 500 cupcakes a day, so it hires extra staff and bakes 600 daily. But it only sells 200. Now it’s wasting money on ingredients, staff, and has unsold stock — and not enough money is coming in. If the bakery had started smaller and adjusted based on real sales, it could have avoided the problem.

Answer 42

Inventory control means managing how much stock a business keeps — whether it’s raw materials, products for sale, or parts used in production. If a business doesn’t manage inventory properly, big problems can happen. 🚫 What Can Go Wrong? 1. Too Much Stock The business spends a lot of money on buying and storing items. That money is now stuck in stock that hasn’t been sold yet — and can’t be used for other things (like paying bills). Holding too much stock also brings extra costs: Storage space Staff to handle it Insurance Risk of theft Products going out of date or becoming unsellable ✅ Example: A clothing store buys loads of winter coats, but winter ends early. Now they must sell the coats at a discount or risk being stuck with them. **2. Wrong Type of Stock** If a business buys items people don’t want, those items might not sell. Eventually, the business may be forced to sell them at a loss just to get rid of them. ✅ Example: A tech shop buys a type of phone that quickly goes out of fashion. Customers aren’t interested, and now the shop is losing money. **3. Too Little Stock** The business runs out of what it needs. This can lead to production delays or missed sales. Customers might get annoyed, buy from a competitor instead — and never come back. ✅ Example: A car parts manufacturer runs out of a key part. Production stops for a few days, and big orders are delayed. Some customers cancel and switch to other suppliers. **✅ Solution: How to Fix Poor Inventory Control** Use inventory tracking systems → Software can help track what’s in stock, what’s selling, and what needs reordering. Forecast demand carefully → Look at past sales and market trends to predict how much stock is actually needed. Use “Just-in-Time” (JIT) ordering → Only order stock when you need it, so you don’t have to store too much. Regularly review stock levels → Check what’s moving and what’s not. Sell off old or unwanted stock before it loses value. Keep good relationships with suppliers → If you ever run low, strong supplier ties can help you get stock quickly. 💡 Simple Example: A café orders too many pastries every morning. Half don’t get sold and go in the bin. That’s wasted money. Later, they try the opposite — ordering too few — and start running out before lunchtime. Customers leave disappointed. ✅ Better plan: Track which pastries sell well, adjust the order size daily, and reduce waste.

Answer 43

Marketing is how a business promotes and sells its products or services. If marketing is done badly, it can cause a business to lose customers, waste money, and even shut down. What Can Go Wrong with Marketing? **Product Doesn’t Meet Customer Needs** - If a business sells something that **people don’t want**, **don’t need**, or **don’t understand**, it probably won’t sell well. ✅ **Example**: Klozee, a clothing rental business in India, failed because most Indian consumers weren’t interested in renting clothes — and many worried about hygiene. The idea worked in the USA, but **not in the Indian market**. --- **Wrong Pricing** - If prices are **too high**, customers won’t buy. - If prices are **too low**, the business might not make enough profit to survive. ✅ Example: A fancy restaurant charges too little for gourmet meals and can’t cover its costs. It quickly runs out of money. --- **Bad Promotion** - Spending too much on **ads that don’t work** or **targeting the wrong people** is a huge waste of money. - Some businesses also send **confusing** or even **offensive** marketing messages, which can turn customers away. ✅ Example: A skincare brand tries to appeal to teens but advertises on channels mostly watched by older adults — the message misses the target audience completely. --- **Poor Market Positioning** - Positioning means how a product is **seen by customers** compared to others in the market. - If a business doesn’t clearly show **what makes it different or better**, customers may just choose something else. - Confusing branding or mixed messages can drive people away. ✅ Example: A gym tries to market itself as “luxury and affordable” at the same time — this mixed message confuses customers, and they choose a more clearly positioned competitor. --- **Solution: How to Avoid Poor Marketing** 1. **Do proper market research** → Understand what customers actually want, and what gaps exist in the market. Ask: Who are they? What do they need? What are they already buying? 2. **Test ideas before fully launching** → Try a small version of the product or a limited marketing campaign to see if people respond well. 3. **Use the right pricing strategy** → Research competitors. Make sure prices are **attractive to customers** but also **cover your costs**. 4. **Target the right audience** → Focus your promotions where your ideal customers spend their time (online, social media, local ads, etc.). 5. **Be clear about your brand and product** → Make sure customers know **what you offer**, **why it’s special**, and **why it’s right for them**. 6. **Learn from feedback** → Listen to customer reviews and suggestions. If something isn’t working, adjust quickly. --- 💡 Real-Life Example: **Klozee** failed because it **copied a business model from another country** without checking if it would work locally. Indian customers didn’t want to rent clothes — they preferred to buy. Plus, hygiene concerns weren’t fully addressed. ✅ **Lesson**: Even if an idea works elsewhere, you must check if it suits the **local market and culture**.

Answer 44

If a business sells **low-quality products** — ones that don’t work well, break easily, or fail to meet customer expectations — it can quickly lose customers and ruin its reputation. --- **What Can Go Wrong with Poor Quality?** 1. **Lost Customers** - People won’t buy again if they feel the product was badly made or didn’t work. - They may also **warn others** not to buy it. 2. **Damaged Reputation** - Even one bad product can make a business **look untrustworthy**, especially if customers talk about it online. - With **social media**, bad news spreads fast. 3. **Expensive Mistakes** - Fixing poor quality later (refunds, repairs, or recalls) can cost a business a lot of money. - If the product causes harm, the business might even face **legal action**. --- 📱 Why This Matters More Today Thanks to the internet and social media: - News of faulty products spreads **instantly**. - A single complaint or viral video can cause **massive damage** to a brand. --- ✅ **Solution: How to Avoid Poor Quality Problems** 1. **Focus on quality from the start** → Build good products using reliable materials and skilled workers. 2. **Use Quality Assurance (QA) systems** → QA means checking and improving quality **through every step** of the production process — not just at the end. 3. **Test products before launching** → Make sure they work properly and are safe for customers to use. 4. **Train staff properly** → Mistakes often happen because workers aren’t properly trained or rushed to finish. 5. **Listen to customer feedback** → If people complain about quality, take it seriously and fix the issue quickly. 6. **Keep improving** → Even if your product is good now, look for ways to make it better and avoid future problems. --- 💡 Real-Life Example: Samsung’s Galaxy Note 7 had a **battery defect** that caused fires. Instead of fixing the issue early, it got worse — leading to a **full global recall** and huge losses. ✅ **Lesson**: Catch quality problems early, before they reach customers.

Answer 45

External causes refer to factors that originate outside a business's control but can significantly impact its performance, stability, and long-term survival. While these factors are not caused by the business itself, they can create conditions that make it difficult for the business to operate successfully. If not managed effectively, these influences can contribute to the failure of the business.

Answer 46

🔎 What’s Happening? Markets don’t stay the same forever. People’s needs, preferences, habits, and lifestyles evolve — and technology plays a huge role in that. 🚨 Why It's a Problem: If a business doesn’t adapt, it gets left behind. The things that worked 5 years ago may not work today. 💡 Real Examples: Blockbuster vs. Netflix: Blockbuster failed to adapt to the rise of streaming and on-demand services. It stuck with DVD rentals while Netflix offered digital streaming and subscriptions — now Blockbuster is gone, and Netflix is worth billions. Toys "R" Us: Despite being a dominant toy retailer, Toys "R" Us failed to embrace e-commerce early. Amazon and Walmart began selling toys online, often at cheaper prices. Toys "R" Us filed for bankruptcy in 2017. Coal Mining Decline: Coal is no longer in high demand, as countries shift to greener energy. Many coal mining businesses have closed because they didn’t adapt or diversify. ✅ Solutions: Monitor market trends regularly using tools like Google Trends, industry reports, and customer feedback. Invest in innovation — explore digital transformation, new platforms, and services. Diversify your offerings so you’re not relying on one product or outdated model. Create flexible business models that can evolve when customer behavior changes.

Answer 47

🔎 What’s Happening? Some industries — like oil, agriculture, or metals — can’t control their prices. They must sell at the global market price. These businesses are called "price takers". 🚨 Why It's a Problem: If prices drop, and your costs stay the same or rise, you could lose money fast and go out of business. 💡 Real Examples: Oil Industry Crash (2014–2016): The price of oil dropped from over $100/barrel to just $30/barrel. → Big oil companies cut jobs and investment. → Smaller producers (especially in North America) shut down or went bankrupt, like Energy XXI and Linn Energy. Coffee Farmers in developing countries often face this. When global prices fall, they earn less — even though their farming costs don’t change. ✅ Solutions: Hedge your prices: Larger companies use contracts or financial tools to lock in prices (called "hedging"). Control your costs: Streamline operations so you can survive price drops. Add value: For example, a coffee farm could roast and brand its own coffee rather than just selling beans — this lets it charge higher prices. Diversify markets: Sell to more than one region or type of buyer.

Answer 48

🔎 What’s Happening? Sometimes, rivals in your industry grow stronger. They may be: More efficient, More innovative, Or just better at connecting with customers. 🚨 Why It's a Problem: Stronger competition can: Steal your market share, Undercut your prices, Or push you out of business completely. 💡 Real Examples: SpoonRocket: A U.S. food delivery startup that failed in 2016 due to overcrowding in the market. It couldn’t compete with the likes of Uber Eats, Postmates, and DoorDash, which had better funding and larger user bases. Western manufacturing vs. China: Many manufacturers in Europe and North America have struggled because China can produce goods much cheaper. Textile factories in the UK, for instance, have closed in large numbers. Borders Bookstore: Failed to keep up with Amazon’s low prices and digital convenience. Borders focused on physical stores while Amazon embraced e-commerce and e-books. ✅ Solutions: Focus on a niche: Serve a specific group really well instead of trying to compete with everyone. Improve customer service: People stay loyal to businesses that treat them well. Innovate constantly: Don’t just keep up — get ahead by launching better features, delivery models, or experiences. Avoid price wars: Competing on price alone can destroy profit. Focus on value, not just cost.

Answer 49

🔎 What’s Happening? The economy goes through ups and downs — these boom and bust cycles affect nearly every business. During a recession: People spend less money. Businesses get fewer orders. Investment slows down. Loans become harder to get. Governments may also change: Taxes Interest rates Spending policies — such as cutting public sector jobs or freezing wages. 🚨 Why It's a Problem: Falling demand, rising taxes, or reduced consumer spending can crush smaller or fragile businesses. 💡 Real Examples: 2008 Financial Crisis: Over 170,000 small businesses closed in the UK in just one year. Consumers were scared, credit was tight, and spending plummeted. Greek Debt Crisis: Government cutbacks and high taxes in Greece led to many business closures, especially those depending on public spending or middle-class customers. COVID-19 pandemic (2020–2022): A global economic shock caused widespread closures. Retail, tourism, and hospitality were hit hard. Thousands of restaurants, airlines, and hotels shut down. ✅ Solutions: Build cash reserves: Save during good times to survive the bad. Cut unnecessary expenses: Run lean operations when the economy gets shaky. Offer flexible payment plans or budget options: This helps keep customers spending even when money is tight. Expand into stable or essential sectors: Some industries (like groceries, healthcare, or digital tools) are more recession-proof.

Answer 50

🔎 What’s the issue? An exchange rate is the value of one country’s currency compared to another. If you’re importing or exporting, changes in the exchange rate can drastically affect your costs or sales. 🚨 Why It's a Problem: If your country’s currency rises in value, your products become more expensive for foreign buyers, so they may stop buying. If your currency falls in value, imported goods (like raw materials or machinery) become more expensive. Businesses that borrow money from foreign lenders may owe much more if the local currency weakens. 💡 Real-World Example: In 2017, Egypt devalued the Egyptian pound, causing it to lose much of its value. Businesses that had borrowed money in foreign currencies (like U.S. dollars) suddenly had to pay much more to repay those loans. A group of Egyptian companies even placed a full-page newspaper ad asking the president for help, saying they were facing bankruptcy because of the currency crisis. ✅ How to Manage It (Solutions): Use hedging: Lock in exchange rates using financial tools to protect against sudden changes. Price smartly: Include possible currency fluctuations in your pricing strategy. Borrow locally: If you earn in local currency, try to avoid borrowing in foreign currencies. Diversify markets: Sell in multiple countries to spread the risk — if one currency drops, another might rise.

Answer 51

🔎 What’s the issue? Interest rates affect how expensive it is to borrow money. Businesses often borrow to grow, buy equipment, or survive tough times. But if interest rates rise, debt becomes more expensive to repay. 🚨 Why It's a Problem: If a business has a lot of debt, rising interest rates mean higher repayments — this eats into cash and profit. If customers also borrow (like using credit cards or loans), they might cut back on spending if interest rates go up. 💡 Real-World Example: In India, high debt and rising interest burdens led to a crisis among farmers: Between 2004 and 2012, about 16,000 farmers per year took their own lives. In 2015, the Indian government reported that 80% of farmer suicides were due to bankruptcy or debt caused by borrowing from banks and private moneylenders. Many farmers couldn’t repay their loans due to high interest rates and poor harvests. ✅ How to Manage It (Solutions): Avoid over-borrowing: Only take loans when necessary and be realistic about repayment. Fix your interest rate: If possible, use fixed-rate loans so that even if rates rise, your repayments stay the same. Build a cash buffer: Keep emergency funds for tough times or unexpected cost increases. Refinance if needed: If rates go too high, look for better terms with another lender to ease pressure.

Answer 52

🔎 What’s the issue? Governments set rules and policies that businesses must follow. Changes in these regulations can impact how businesses operate, sometimes leading to increased costs or operational challenges. 🚨 Why It's a Problem: Restrictive Legislation: New laws can limit business activities or increase compliance costs. Subsidy Cuts: Reduction in government subsidies can make certain products or services less profitable. Expenditure Reductions: Cuts in government spending can decrease demand for certain goods and services. 💡 Real-World Examples: Payday Loan Restrictions in the UK (2014): The UK government introduced stricter regulations on payday loans, capping interest rates and fees. This led several payday lenders to exit the market, reducing competition and access for consumers. SolarWorld's Challenges in Germany (2017): SolarWorld, a manufacturer of solar panels, went into administration partly due to cuts in government subsidies for renewable energy. The reduction in financial support made it difficult for the company to compete, leading to its decline. ✅ How to Manage It (Solutions): Stay Informed: Regularly monitor legislative developments to anticipate and adapt to regulatory changes. Engage with Policymakers: Participate in industry groups to influence policy decisions and stay informed about potential changes. Diversify Revenue Streams: Reduce reliance on government subsidies by exploring alternative markets or products. Enhance Compliance Programs: Invest in compliance infrastructure to efficiently adapt to new regulations.

Answer 53

🔎 What’s the issue? Dependence on suppliers for essential goods or services means that any disruption in their operations can directly affect your business's ability to serve customers. 🚨 Why It's a Problem: Supply Chain Disruptions: Delays or quality issues from suppliers can halt production and lead to customer dissatisfaction. Operational Downtime: Waiting for critical supplies can lead to operational standstills, affecting revenue. 💡 Real-World Example: BMW's Production Halt Due to Bosch Supply Issues (2017): BMW experienced production slowdowns and stoppages in Germany, China, and South Africa because Bosch, a key supplier of steering gears, faced delivery problems. This disruption highlighted the risks of relying heavily on single suppliers and the importance of robust supply chain management. ✅ How to Manage It (Solutions): Diversify Suppliers: Engage multiple suppliers for critical components to mitigate risks associated with single-source dependencies. Establish Clear Contracts: Define delivery schedules, quality standards, and penalties for non-compliance in supplier agreements. Maintain Safety Stock: Keep an inventory buffer of essential supplies to cushion against unexpected disruptions. Develop Contingency Plans: Create strategies to quickly switch suppliers or adjust operations in case of supply chain issues.

Answer 54

🔎 What’s the issue? Natural events such as floods, droughts, or diseases can disrupt business operations, especially for companies reliant on agriculture or natural resources. 🚨 Why It's a Problem: Resource Scarcity: Adverse weather can reduce the availability of raw materials. Operational Disruptions: Natural disasters can damage facilities and disrupt logistics. Financial Losses: Damage to assets and reduced productivity can lead to significant financial challenges. 💡 Real-World Examples: South African Agricultural Sector (2016): A severe drought in South Africa led to a significant increase in company bankruptcies, particularly in the agricultural sector. The lack of rainfall severely impacted crop yields, leading to financial distress for many businesses. Olive Tree Disease in Italy (2016): The discovery of Xylella fastidiosa, a plant disease, led to the destruction of thousands of olive trees in southern Italy. Farmers faced significant losses, with many at risk of bankruptcy without government compensation. ✅ How to Manage It (Solutions): Risk Assessment: Regularly evaluate the potential impact of natural disasters on operations. Invest in Resilient Infrastructure: Build facilities and systems capable of withstanding natural events. Purchase Insurance: Secure coverage against natural disasters to mitigate financial losses. Develop Disaster Recovery Plans: Establish procedures to quickly resume operations after a natural event.