Rosetta opened '"Lovin' That Muffin" using her inheritance as startup funding. She started the bakery as a retail-only location, then started selling to a few stores and coffee shops as well. Rosetta was extremely proud of her baked goods. No price was too high for quality ingredients and she personally supervised the baking process for everything she sold. One day Rosetta's accountant, after reviewing the latest income statement, told her that sales had been steadily increasing the last several months, but that profits were down significantly and a cash crisis was looming. Rosetta did not understand how profits could possibly be going down while sales were going up. The accountant explained that as sales had gone up, so had some of her costs. For example, Rosetta had switched to some higher-priced ingredients recently and she had brought on a new employee to help with the increased baking load. He also said that by giving terms, that is, allowing the coffees shops to pay for their orders in 30 or 60 days, she had increased sales but reduced cash flow. If current trends continued, she would run out of cash in about three months. Rosetta had poured her entire inheritance into this business, not to mention her very heart and soul. She was devastated. What could she do? Her accountant assured her that while the situation was not good, it was by no means hopeless. He suggested three strategies that might help her get through this looming crisis. First, he suggested that she go back to the original ingredients she used or negotiate the price with her current supplier. Second, he suggested looking at accounts that were behind in payment. Subsequently, he advised setting up tighter controls for accounts receivable, including a stiffer late penalty, more frequent late notices, and cutting off delivery to accounts over 90 days past due. Last, he suggested that Rosetta raise her prices. Even if she were to lose a few customers, she would make it up in margins on the others. Yes, you certainly are. Asked to write and reflect upon her recent struggles and lessons learned as a small business owner for a Baking Magazine, Rosetta had this to say: 1) I thought that increasing sales was always a good thing. It isn't. You have to make sure you have enough cash to pay the increased costs. 2) Be firm with your terms. It is OK to let people pay later, but they have to pay on time. A long delay in payments can wreak cash-flow havoc. 3) If your product is better, charge more for it. Charging a discount price for a premium product is a fool's errand. 4) Hire an accountant that you can understand. Mine explained the problem to me in a way that made sense. He probably saved my business.

The central lesson in this video is:

A.) Giving terms to customers is a financially detrimental policy.

B.) Being tough with customers who are behind in their payments is detrimental to sales.

C.) Small business owners need to understand basic accounting concepts in order to manage their finances well.

D.) High-cost ingredients are usually fatal to a bakery's bottom line.

The best description of "profit" is:

A.) A synonym for cash flow.

B.) Revenues minus administrative expenses for a given period of time.

C.) An accounting term describing how much money a business is making.

D.) Money that is left over each month after paying all the bills.

Which of the following mistakes did the most damage to Rosetta's business?

a.) Selling to stores and coffee shops rather than staying a retail-only business.

b.) Increasing the quality without increasing the price.

C.) Switching back to the lower-cost ingredients after using better ones for a while.

D.) Trying to teach a new person to bake instead of doing it herself.