Practise comparing internal and external finance sources and analysing cost, control, flexibility, debt and purpose before recommending a source suited to the business context.
Festival Wear (FW)
FW is a partnership started by two friends, Maz and Jane. FW manufactures and sells high quality T-shirts at $ 40 each. The business can manufacture 35000 T-shirts per month using mass customisation. The T-shirts are only sold at music festivals and concerts and are customised to each event. FW has never advertised the T-shirts, relying on a sales team to attend a festival or concert and personally sell the T-shirts.
Current costs:
- variable: $ 10 per T-shirt
- fixed: $ 200000 per month.
Sales average 27000 T-shirts per month. Currently the sales team is paid a monthly salary, but Maz is proposing a new payment method in order to increase sales volume. This will mean a lower monthly salary but a commission of $ 2 per T-shirt will be paid. Maz estimates that sales volume would increase to 30000 per month.
Costs if the new payment method is introduced:
- variable: $ 12 per T-shirt
- fixed: $ 182000 per month.
Analyse two external sources of finance that FW could use to invest in new machinery.
Office Furniture Designs (OFD)
Markus is an entrepreneur and is planning to set up a private limited company called OFD in four weeks' time. OFD will be an online retailer selling office furniture directly to business customers. Products will be sent directly to customers from OFD's warehouse. OFD's product range will include office chairs, desks and filing cabinets.
Markus will have limited start-up funds. OFD will operate in a competitive market and Markus is keen to offer high-quality customer service. He also will have to think carefully about opportunity cost.
As part of his business planning, Markus has prepared a cash flow forecast (see Table 1.1).
Table 1.1 OFD's cash flow forecast June - August 2023 (\$ 000)
Markus plans to offer all customers one month trade credit. However, as OFD is a new business, suppliers may insist on payment on delivery. Markus is currently researching sources of finance to improve OFD's cash flow.
OFD will need five employees who will work in the warehouse and three customer service assistants. Markus plans to offer two weeks of induction training to all employees.
Explain one factor that will influence Markus' choice of a source of 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.
Evaluate whether Samira should accept Lara's offer to invest venture capital.