Practise explaining why businesses need finance and working capital, distinguishing receivables and bankruptcy and evaluating how liquidity management affects survival and growth.
Define the term trade receivables.
Explain one reason why a business may need finance.
Samira's Whiteboards (SW)
Samira left school at the age of 18 in country H . She had a small amount of savings and an idea to create a flexible, removable and reusable whiteboard. Samira created a prototype and received small orders from local retailers.
A local manufacturer batch produces stock when required. There is a two-week lead time for a minimum order of 500 units. Samira started to sell her whiteboards on her website and at trade shows. She has been trading for seven months. She has good cashflow but little working capital as production costs are high.
Samira has heard that OS, a large business that sells office equipment, is planning to sell their own version of Samira's whiteboard. She is keen to increase production quickly to take advantage of being first to market. However, Samira's manufacturer cannot supply enough product to meet the growth in potential demand for whiteboards.
Fig. 1.1 shows an inventory control chart for the first seven months of trade.
Lara, a venture capitalist with experience of manufacturing, has approached Samira about making an investment. She would invest $ 100000 to build a local mass production facility for SW. The facility would have a maximum output of 50000 units per month. Lara wants to own 40% of the business.
Explain the term working capital.