Kate knew a good thing when she saw it. She was traveling in Italy when she spotted pottery shops that made beautiful products ranging from ashtrays to lamps. The pottery was stunning in design.

Kate began importing the products to Canada, and sales took off. Customers immediately realized the quality of the items and were willing to pay top price. She decided to keep prices moderate to expand rapidly, and she did. Sales in the second three months were double those of the first few months. Sales in the second year were double those of the first year.

Every few months, Kate had to run to the bank to borrow more money. She didnt really discuss her financial situation with her banker because she had no problems getting larger loans because she always paid promptly. To save on the cost of buying goods, Kate always took trade discounts. That is, she paid all bills within 10 days to save the 2% offered by her suppliers for paying so quickly.

Most customers bought Kates products on credit. They would buy a couple of lamps and a pot, and Kate would allow them to pay over time. Some were very slow in paying her, taking six months or more.

In the third year, Kate noticed a small drop in her business. The local economy was not doing well. One day, the bank called Kate and told her she was late in her payments. She told them she had been so busy that she didnt notice the bills. The problem was that Kate had no cash available to pay the bank. She frantically called several customers for payment, but they were not able to pay her, either. Kate was in a classic cash flow bind. Not knowing what to do, she booked an appointment with her banker to review her financial condition. The banker noted her accounts receivable and assets and helped her prepare a cash budget before giving her another loan. He also made a number of suggestions to improve her cash flow bind.

Her import business grew much more slowly thereafter, but her financial condition improved greatly. Kate had nearly gone bankrupt, but she recovered in time to avoid bankruptcy.

1.How is it possible to have high sales and high profits and run out of cash?

2.What 2 actions was the banker most likely to recommend as a way to resolve the cash flow problem? Explain why they would improve Kate's situation.

3.What was the nature of Kates problem? Was she correct to go to the banker for help, even though she owed the bank money?

4.Given this example, what 3 pieces of advice would you give to another budding entrepreneur so that they would not encounter similar problems?