Scenarios: Cash Flow, ROI, and Break-Even Analysis

Minho runs a small online clothing boutique. Last month his income statement showed a profit of $2,000, but his bank account balance dropped by $800. He recently sold $3,000 worth of merchandise to a local school on credit, and that payment has not been collected yet.

Why does Minho show a profit on paper but have less cash in his bank account?

• His fixed costs increased and reduced his available cash

• The $3,000 credit sale was recorded as income but the cash has not been received yet

• His expenses were higher than his revenue for the month

• He spent too much money on inventory before the month started

The $3,000 the school owes Minho but has not yet paid is best described as

• Cash inflow

• Accounts receivable

• Net profit

• Accounts payable

Name one corrective action Minho should take to improve his cash flow and explain why it would help.

Isabela opened a food truck selling gourmet tacos. Her fixed costs are $1,500 per month, each taco costs $2.00 to make, and she sells each taco for $5.00. She wants to know how many tacos she must sell each month just to cover all of her costs before earning any profit.

Using the break-even formula, how many tacos must Isabela sell each month to reach her break-even point?

• 300 tacos

• 1,500 tacos

• 750 tacos

• 500 tacos

Isabela spent $400 on a social media advertising campaign and gained $1,200 in new sales directly from it. What is the ROI of her campaign?

• 33%

• 100%

• 300%

• 200%

List two things Isabela could do to lower her break-even point without raising her taco price.