Jiclepa Plásticos (JP)

Carlos Rojas is a sole trader in Costa Rica. He is the owner of Jiclepa Plásticos (JP), which has
operated in the recycling sector for four years, buying and selling plastic waste. Carlos rents a
warehouse where he sorts and prepares the plastic waste to be delivered to his clients. JP normally
has a high level of stock of plastic waste in the warehouse.

The recycling industry for small businesses is highly competitive. Carlos buys the plastic waste from
multiple suppliers and normally pays by cash. Currently, customers pay one month after receiving
the goods, but are asking for their credit terms to be extended from 30 days to 45 days. Carlos is
concerned about his cash flow position.

Sustainability is important in Costa Rica and the government is promoting ecotourism. The
government has also agreed to provide JP with a grant to continue operating the recycling business
but will not receive this until 2026. Carlos has applied for a bank loan to solve his liquidity problems.
However, the bank manager wants to see an updated cash flow forecast for JP for the first four
months of 2024. Table 1 and Table 2 contain forecasted financial information for JP.

Table 1: Forecasted sales revenue and cost of sales for JP (in $’000)

Sales revenue Cost of sales

December 2023 400 250
January 2024 500 300
February 2024 550 440
March 2024 600 480
April 2024 625 500

Table 2: Forecasted financial figures for JP (in $’000)

Opening balance on January 1, 2024 5
Monthly rent 20
Packaging per month 10
Salaries and wages paid every month 50
Heating and lighting paid every other month
4
starting in January
4% of the sales revenue
Delivery charges per month
per month, paid in cash
Tax refund paid in February 30

(a) With reference to the case study, distinguish between cash flow and profit. [4 marks]

Cash flow refers to the movement (inflow and outflow) of money in a business. Profit is the financial
surplus after all JP’s costs have been deducted from its sales revenue. JP’s cash inflows come from
its sales revenue and the tax refund, while its cash outflows include rent, packaging, salaries, utility
bills, and delivery charges.

Positive net cash flow is necessary for the day-to-day operations of the business, such as paying its
expenses. JP can be profitable but still have cash flow issues. For example, JP’s customers have
one month credit, but it still has to pay suppliers at the time of purchasing the plastic waste. This
could lead to cash flow issues.
Accept any other relevant difference.

Award [1-2] for a limited understanding of the demands of the question.

Award [3-4] for an accurate and clear explanation of the difference between profit and cash flow,
with appropriate application to JP.

(b) Prepare a cash flow forecast for JP for the first four months of 2024. [6 marks]

Cash flow forecast for JP for the first four months of 2024

All figures in $’000 January February March April

Opening balance 5 1 (11) (49)

Cash inflows

Sales revenue (credit) 400 500 550 600

Tax refund 0 30 0 0

Total cash inflows 400 530 550 600

Cash outflows

Cost of sales 300 440 480 500

Rent 20 20 20 20

Packaging 10 10 10 10

Salaries and wages 50 50 50 50

Heating and lighting 4 0 4 0

Delivery charges 20 22 24 25

Total cash outflows 404 542 588 605

Net cash flow (4) (12) (38) (5)

Closing balance 1 (11) (49) (54)

Apply the own figure rule (OFR) - if a student makes an error in one aspect (such as having heating
and lighting in the incorrect month) and this error carries forward in the cash flow forecast, it should
only count as one error.

A student would also lose [1] if an item is misclassified as a cash inflow or cash outflow (such as
classifying the tax refund as a cash outflow).
Award [1] if the student has partial understanding of cash flow forecasts, but produces a forecast
that is incorrect, incomplete, or illegible.

Award [2–3] if the student prepares a cash flow forecast but has not used appropriate IB formatting
(or is not legible) and/or there are three or more errors. These errors could be mathematical,
theoretical, or omissions (such as not including the required components – bolded in the table
above). For instance, the use of the word “profit” instead of “net cash flow” is a theoretical error.
Additionally, using “net profit in the cash flow forecast” instead of “net cash flow” is an error and [1]
should be deducted. If the student includes all cash outflows in one row, deduct [1].

Award [4–5] if the student prepares the cash flow forecast legibly and in the correct IB format, but
there is one error for [5] or two errors for [4].

Award [6] if the student prepares the cash flow forecast correctly and legibly in the IB format and
has no errors, including an appropriate title.

Full working is not expected.

(c) Discuss two strategies that JP could implement to improve its cash flow position. [10 marks]

JP needs to aim to reduce its cash outflows and increase its cash inflows.

• Carlos can negotiate to reduce the price he pays to his suppliers for the plastic waste, although
this may impact the quality of the product and/or his relationship with suppliers.
• Alternatively, Carlos could try to improve trade credit terms by negotiating with suppliers to pay
after 30 days but before 60 days (instead of paying them in cash at the time of purchasing the
plastic waste). However, JP’s suppliers may not agree to these terms, and instead choose to
sell to other businesses that will pay by cash. The outcome will depend on JP’s relationship
and reputation with its suppliers.
• JP could offer its customers shorter credit terms, which would shorten the working capital cycle.
However, changing credit terms with customers may not be pragmatic, as some customers
may instead purchase from JP’s competitors that offer more favourable credit terms, although
no such information if provided in the stimulus material.
• JP could reduce the level of its stock of plastic waste in the warehouse. This will reduce the
cash outflows needed to buy more plastic waste. It is known from the case study that JP
normally holds a high stock of the waste, which has a negative impact on its cash flow.
• If necessary, JP could use a debt factoring service to chase outstanding debts from its
customers. Although there is a significant fee for this service, the debt factor could help JP to
get much-needed cash from its customers who have bought on credit.
• Other strategies could include seeking additional sources of finances to improve JP’s cash flow
position. For example, JP could arrange an overdraft with the bank (although this would incur
higher interest rates) or discuss with the government the possibility of receiving the grant earlier
(rather than two years later).

In order to make a more informed decision, information on Carlos’ relationship with his suppliers and
customers would be beneficial. This would allow for a stakeholder analysis of the power and interest
of the different stakeholder groups to determine which of the strategies discussed above are most
feasible.

Accept any other relevant answer.

It is expected that students make a substantiated conclusion.

 Marks should be allocated according to the markbands on pages 44-45 and 47-48 in the
Business Management guide.

Additional guidance:
For only one advantage or one disadvantage, award a maximum of [3]. For two
advantages, two disadvantages, or the consideration of only one strategy, award a
maximum of [4].

Award a maximum of [6] if there is a balanced analysis and understanding throughout

the response with reference to the case study but there is no judgement or conclusion.

A balanced response includes at least one advantage and one disadvantage for each
proposed strategy to improve JP’s cash flow position.

Students cannot reach the [7-8] markband if the judgements or conclusions are not
substantiated by the analysis/explanation already provided in their answer.

In addition, limitations of the stimulus in the case study or stimulus material must be
considered to reach the top [9-10] markband.