Chapter 33 Exercises — Cash Flow and Working Capital

Thirty-four problems, graduated from recall to judgment. Items marked with a dagger (†) have worked solutions in the answers appendix. Do the arithmetic by hand or in a spreadsheet — not in your head. Every number in this chapter's Bellwether figures is available to you; where a problem needs one you do not have, say so explicitly rather than inventing it.

All Bellwether figures are constructed teaching examples.

A. Recall and definitions

33.1 State the definition of working capital, and explain in one sentence why a restaurant can have positive working capital on paper and still be unable to fund Friday's payroll.

33.2 † Name the three categories of cash outflow that never appear on a profit-and-loss statement. For each, give the specific Bellwether figure from this chapter.

33.3 Write out the cash conversion cycle formula and define each of its three components in one sentence apiece.

33.4 Distinguish the construction contingency from the working-capital reserve. Which one did Bellwether's $36,300 pre-opening overrun consume, and why did it have no other option?

33.5 What does "trust-fund money" mean in the context of sales tax, and name two consequences of that legal characterization that do not apply to an ordinary trade payable.

33.6 † Define runway. Compute Bellwether's runway at $8,700, at $45,000, and at the $101,375 bottom-up requirement, using $48,933 of monthly fixed obligations and a 30-day month.

33.7 What is vendor float, and why is it accurate to describe it as a liability that looks like cash?

33.8 List the six line-item categories that make up Bellwether's $48,933 of monthly fixed obligations, and state which P&L category each sits in.

B. Applied reasoning

33.9 Bellwether's thirteen-week forecast shows the balance falling in six of thirteen weeks. Identify what those six weeks have in common, and explain why that pattern is a property of the disbursement calendar rather than of the business.

33.10 † Week 6 of the forecast has the highest sales of the quarter ($34,600) and a net cash change of only +$700. Week 7 has lower sales ($33,200) and a net change of +$14,084. Explain the difference in full, naming every line that moved.

33.11 The chapter argues that mature restaurants often run a negative cash conversion cycle and still fail at the rates the research documents. Give the three reasons offered, and rank them by how much they would matter to a first-time operator opening a 68-seat full-service restaurant.

33.12 Bellwether's certificate of occupancy was issued in the second week of March; the restaurant opened the first Tuesday in April. Explain, in dollars, what that four-week gap cost, and what clause in the Chapter 6 lease produced the cost.

33.13 Why does the sales-tax remittance lag hurt a restaurant in a falling month and help it in a rising one? Compute the January swing for Bellwether from the timing calendar.

33.14 † An operator tells you their line of credit balance has been between $30,000 and $45,000 for the past fourteen months and that the business is "fine, we just use the line." Diagnose what has actually happened, name the instrument the business now effectively holds, and state what you would want to see before accepting the "fine."

33.15 February's average dinner service is 87 covers against a cash break-even of 77. Explain why that eight-cover-average cushion is a misleading way to describe the month, using the night-by-night figures from §33.6.

33.16 The chapter claims the trough in the thirteen-week forecast is "almost exactly the first three weeks' labor overrun." Show the arithmetic that supports the claim, then state one reason the two numbers are not identical.

C. Cost this / compute this

33.17 Bellwether purchases $6,438 of food and $1,836 of beverage a week. Compute the vendor float created by net-7 terms, net-14 terms, and net-30 terms. State which of the three is realistic for a twelve-month-old independent and why.

33.18 † A dry-goods supplier offers 2/10 net 30 on $84,000 of annual purchases. Compute (a) the annualized cost of passing up the discount, (b) the dollars given up in a year, and (c) the cost of taking the discount with money drawn at 11% on a line of credit. State the decision.

33.19 Compute Bellwether's blended days inventory outstanding if the beverage program is cut from $19,300 of inventory to $12,000 by pruning the by-the-glass list and reducing backup stock, with food inventory unchanged at $8,400 and daily COGS unchanged at $1,179. How many dollars of cash does that release?

33.20 † Build the profit-to-cash bridge for a month in which a restaurant reports $14,200 of net profit, repays $2,742 of debt principal, builds $3,100 of inventory, takes a $6,000 owner distribution, remits $2,400 more sales tax than it collected, and has no other timing differences. What is the change in cash?

33.21 Bellwether's biweekly payroll at plan volume is $19,231. Compute the extra cash outflow in a three-payroll month, and state what the profit-and-loss statement for that month shows as the labor line relative to a two-payroll month. Explain the difference.

33.22 † Using the fixed-obligation stack of $48,933, compute the working-capital requirement under the 60-day rule and the 90-day rule. Then compute what percentage of Bellwether's $1,550,000 year-one revenue each represents.

33.23 A merchant cash advance offers $40,000 at a 1.42 factor rate, repaid by a 14% holdback on card volume. The restaurant does $26,000 a week in sales, 92% of it on cards. Compute the total repaid, the daily holdback, and roughly how long repayment takes. Then state the simple cost as a percentage of the amount advanced.

33.24 From the timing calendar: compute the total sales tax Bellwether collects in year one, the total it remits within year one, and the difference. Explain what the difference is and where it should be sitting on March 31.

D. Build this / read this

33.25 Build a six-week cash forecast for a 40-seat restaurant from the following: opening balance $14,000; weekly collections $18,500, $19,200, $17,800, $16,400, $16,900, $18,100 (including 6% sales tax collected); weekly purchases 30% of net sales, paid COD; biweekly payroll of $11,600 disbursed in weeks 2, 4, and 6; rent $5,200 in week 1 and week 5; sales tax remittance of $4,100 in week 3; insurance and debt service of $3,400 in weeks 1 and 5. Find the trough and state the week it occurs.

33.26 † Read Figure 33.6 and answer: (a) in which week does the restaurant have the most cash that is not its own, (b) what is the largest single scheduled lump in the quarter and what is it composed of, and (c) if the operator had delayed the full hourly crew's start by two weeks, saving $7,400 of labor in weeks 1 and 2, would the week-2 balance still have been negative?

33.27 Read the February cash statement in §33.6 and identify the three items that would not appear in a normal month. Restate February's cash result with those three items removed, and say what that tells you about whether February is a structural problem or a calendar problem.

33.28 † Take Bellwether's timing calendar and re-plan it. You may move at most three obligations and you may not move rent, payroll, or sales tax. Show the four collision months before and after, and quantify the improvement in the worst month.

E. Write this

33.29 Write the one-page cash policy for Bellwether that a manager could follow without you in the building. It must cover: what money is swept where and when; who may release a payables run and up to what amount; the draw-and-repay triggers on the credit facility; what happens to event deposits; and the standing Monday agenda. Maximum 400 words.

33.30 † Write the email to Bellwether's broadline distributor's credit department, in month one, opening the vendor-terms conversation. It should ask for something specific, offer something specific, and set a date to revisit. Maximum 200 words. Then write the second version of the same email, sent in month twelve after eleven months of on-time payment, and explain what changed and why.

F. Judgment and ethics

33.31 It is the second Friday in October. The 40-top private party is on the books, $3,174 of its $4,232 contract is already collected, and the grill cook has no-showed at 3:40. Your options are to call the sous in on a sixth consecutive day at overtime, run the station short and risk the party's service, or cut the à la carte menu for the night. Cost each option in cash for this pay period, name the option with the worst cash outcome and the option with the worst hospitality outcome, and defend your choice in five sentences.

33.32 An operator two months from a possible closure is deciding whether to keep selling gift cards for the holidays. Selling them produces cash now and a liability to redeem later; not selling them removes a revenue line at the worst moment. Set out the ethical considerations on both sides, state what you would do, and identify what disclosure — if any — the operator owes a guest buying a $200 gift card in December.

33.33 † Business Plan extension. Bellwether's working-capital shortfall is $56,375. You have four ways to close it: additional owner injection, a larger credit facility, a reduced build-out scope (deferring the hearth upgrade and opening with the existing equipment), or a shorter pre-opening period with a later full-crew start. For each, write two sentences on what it costs and what it risks — including the risks that do not show up as dollars — and then rank them. Add your ranking and its justification to the plan's Cash Flow section as the "sources of the shortfall" subsection.

33.34 Business Plan extension. Write the paragraph for Bellwether's plan that states the February problem honestly to a skeptical reader. It must include the month-eleven timing, the revenue figure, the fixed-obligation figure, the three-of-five-services finding, and the profit-versus-cash divergence — and it must not editorialize, minimize, or promise anything the rest of the plan cannot support. Maximum 200 words.