Workplace Beverages Ltd (Cash and cash-flow)

Specification Topic: Cash and cash-flow

Case Study: Workplace Beverages Ltd

Henry Black set up Workplace Beverages six years ago. The business installs and services tea and coffee
making machines in offices and factories across the south-east. Customers can also choose to have drink
sachets ordered and delivered in regular monthly deliveries. Over the last three years, the business has
earned a profit of an average of £60,000 a year.

Over the past couple of years, increased competition has started to put the business under increased financial
pressure. In addition, uncertainty over Brexit has caused some small businesses to be more cautious about
spending. Some of Henry’s existing and potential customers are reluctant to invest in new machines and are
cutting back on purchases of tea and coffee sachets, preferring to allow their employees to purchase their
own tea and coffee to save on costs.

To keep some customers, Henry has been forced to extend their trade credit terms from 28 to 48 days. In
addition, Henry’s tea and coffee sachet supplier, one of only two major suppliers of sachets that can be used
with his machines, has recently advised that it will be reducing trade credit to Workplace Beverages from 28
to 21 days.

At least there was some good news – a friend of Henry remains convinced that the long-term prospects for
the business look good and recently agreed to invest £36,000 in return for a 20% share in the business.

Henry has put together a cash-flow forecast, shown in Table 1, for the next 6 months, ahead of a meeting
with his bank manager to discuss an extension to his £60,000 overdraft limit.

Table 1 : Cash-flow forecast

January – March £’000 April – June £’000
Inflows
Payments from customers 60 75
Share capital funds 36 0
Total inflows 96 75

Outflows
Rent 2 2
Labour costs 18 23
Supplies 70 50
Marketing and administration 15 15
Total outflows 105 90
Net cash-flow (15)
Opening balance (45)
Closing balance (54) (69)

Exam-style questions:
1. Complete the table with the two missing values, in the shaded boxes, in the cash-flow forecast (2)
2. Outline one reason why the net cash-flow in the table cannot be described as profit (2)
3. Outline one benefit to Henry of producing a cash-flow forecast (2)
4. Evaluate whether Henry’s friend is wise to invest in Workplace Beverages Ltd. You should use the
information provided as well as your own knowledge of business (12)

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Workplace Beverages Ltd (Cash and cash-flow)

Possible answers:

1. Complete the table with the two missing values, in the shaded boxes, in the cash-flow forecast

Net cash-flow January to March = total inflows – total outflows = £96,000 - £105,000 = (£9,000) (1)
Opening balance April to June = closing balance January to March = (£54,000) (1)

2. Outline one reason why the net cash-flow in the table cannot be described as profit
• The cash-flow table includes a share capital investment from Henry’s friend which
does not reflect the normal trading activity of the business
• The inflows are not likely to reflect the actual sales expected in the period, as Henry
has decided to offer 48 days trade credit to some of his customers.
• The outflows will also not necessarily reflect actual costs incurred, since these are
also received on 28 days trade credit, due to reduce to 21 shortly

3. Outline one benefit to Henry of producing a cash-flow forecast

• Henry has a meeting with the bank to discuss extending his overdraft. He will be
able to estimate how much of an extension he needs through the production of a
cash-flow forecast
• Henry is able to see the impact of recent trade credit changes upon his finances and
therefore plan appropriate sources of finance to cover any shortfalls in cash

4. Evaluate whether Henry’s friend is wise to invest in Workplace Beverages Ltd

• A wise investment opportunity is one that will ensure a good return in the form of
dividends
• Investment may be risky in a business that has poor cash-flow

• Based on previous years’ average profits it will take Henry’s friend three years to
recoup his investment in dividends (20% of £60,000 = £12,000)
• The business clearly has some very challenging cash-flow issues, as shown in Table 1,
which need to be resolved

• This would be seen as a good return based on alternatives, such as putting money in
a savings account
• If these issues are not resolved, the business could become insolvent, resulting in
Henry’s friend potentially losing all of his investment

• The business has been trading for six years and therefore is established. Most
business failures occur within the first three years of trading. Therefore, the friend is
wise to invest, as some of the difficulties the business is facing appear to be linked to
uncertainty associated with Brexit. Once this area starts to become clearer, business
may pick up again. This means that provided the difficulties are only short-term and
the cash-flow issues can be addressed, Henry’s friend will be rewarded for his
investment in the form of dividends
• It was a mistake to invest, as there is so much uncertainty around Brexit. The
business appears to have a very bleak forecast for the coming 6 months and beyond
if the uncertainty continues. As a limited company shareholder, Henry’s friend could

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Workplace Beverages Ltd (Cash and cash-flow)

stand to lose all of the £36,000 he has invested, although no more and he may have
been wiser investing in a bank or another more stable business. However, the
decision ultimately depends on the objectives of Henry’s friend and whether he is
looking for short-term return on his investment or a longer term investment by
supporting a friend in his business venture

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