Cash and cash equivalents are a group of assets owned by a company that are cash or can be

converted into cash immediately. Cash and cash equivalents help companies with their working
capital needs since these liquid assets are used to pay off current liabilities, which are short-
term debts and bills.

A bakery business, like any other business, needs to manage its cash and cash equivalents
effectively to keep the shop in operation and avoid cash flow problems. Cash flow is the
movement of money in and out of the business. A positive cash flow means that the business
has more money coming in than going out, while a negative cash flow means the opposite.

Some of the ways that a bakery business can manage its cash and cash equivalents are:

● Keep inventory fresh. Baking products are generally prone to spoilage, especially when
not kept in optimal storage conditions. All ingredients must be maintained in desirable
temperatures and airtight containers to obtain their maximum shelf life. Otherwise,
these products will become obsolete and head their way into the trash bin, resulting in
wasted money and inventory. A bakery business should implement the FIFO system or
the first-in-first-out method, which encourages using older products or those with
shorter shelf lives first. This ensures that all ingredients are used and consumed before
their “best used by” dates, avoiding wastage and preventable expenses altogether.

● Order in bulk. Bulk orders prove to be cost-effective in keeping expenses low and
increasing profit. Most small business owners opt for wholesale items because they can
get their raw materials at a much lower price and save a few trips to their suppliers.
However, not all goods should be bought in bulk. It’s important to know what and when
to place bulk orders. An overwhelming amount of inventory requires maintenance costs
and consumes more space. On the other hand, a lack of raw materials would be
detrimental in fulfilling customer orders. It’s critical to balance the business’ inventory
by identifying which raw materials are used commonly and which ones aren’t.

● Have access to a line of credit. A business line of credit is an entrepreneur’s go-to fund
for emergencies such as disasters, an unexpected surge in orders, or equipment repairs.
A line of credit allows the borrower to take out funds from their accounts anytime they
need more capital. The borrower will need to pay back what they’ve withdrawn, plus
interest, on or before the due date. If the borrower did not use the funds, they are not
subject to any interest fees. Small business owners may use their line of credit to
maintain positive cash flow in such a way that they gain access to working capital when
money gets tight.

● Prepare a cash flow statement. A cash flow statement shows the cash coming in and
out of business within a specific timeframe (usually a month, quarter or year). Its
 purpose is to indicate whether the net cash flow has increased or decreased. The
statement looks at three activities: operating, investing and financing. Operating
activities are the main sources and uses of cash for the business, such as sales revenue,
cost of goods sold, wages, rent, utilities, taxes, etc. Investing activities are the cash flows
related to buying or selling long-term assets, such as equipment, machinery, vehicles,
etc. Financing activities are the cash flows related to borrowing or repaying loans,
issuing or buying back shares, paying dividends, etc. A bakery business should prepare a
cash flow statement regularly to monitor its cash position and identify any potential
issues or opportunities.

Some examples of realistic business scenarios involving cash and cash equivalents for a bakery
business are:
● A bakery sells its cakes on credit and collects the receivables in cash after 15 days. The
collection of receivables is an operating activity that increases cash and cash
equivalents.

● A bakery buys a new oven by paying cash. The purchase of oven is an investing activity
that decreases cash and cash equivalents.

● A bakery obtains a loan from a bank and receives cash from the lender. The obtaining of
loan is a financing activity that increases cash and cash equivalents.