QUIZ 5

Business and Management

Ch. 20 WORKING CAPITAL

NAME:___FABRICIO AGREDA_________ DATE:___SEP 17 14 ___________

SCORE: _________/100 TEACHER: Violeta Soto 12TH Grade: A B

1. A: This can be a short-term or long-term borrowing. It can be sourced from banks,

other businesses or business angels

B: This is the ability of a firm to pay its short-term debts.

2. Many businesses make a 100% of profit by the costs of the materials, this is called a
mark-up on the cost of materials. This means that the cost of materials would be doubled
in order to arrive at the selling price of the product.

3.

1=M$ Jan Feb March April May June

Inflows
Sales 20 20 20 40 40 40
Loan 20
TOTAL INFLOWS 20 40 20 40 40 40
Outflows
Materials 10 10 10 20 20 20
Elec./gas 20
Wages 2 2 2 3 3 3
Erin & Carl 20
Marketing 0.5 0.5 0.5 0.5 0.5 0.5
Refit cost 20
TOTAL OUTFLWS 12.5 32.5 32.5 23.5 23.5 23.5
Net cash flow (I– O) 7.5 7.5 (12.5) 16.5 16.5 16.5
Opening balance 7 14.5 22 9.5 26 42.5
Closing balance 14.5 22 9.5 26 42.5 59

4. Advantages

 Extra advice and experience of venture capitalists could be useful.

 £20,000 is a sizeable sum which is only really needed for March and April and so
could offer the possibility of further future expansion.
 Share capital need not be repaid.

Disadvantages:

 Erin and Carl would be giving away 20% of the ownership when they only really
need the cash for two months. This seems a heavy price to pay.
 If they simply delayed taking their own drawings for two months they would not
need to give up 20% of the business.
 Dividends are paid after tax whereas loan interest is paid before tax.