Chapter 33 Self-Check — Cash Flow and Working Capital

Twenty-four questions. Answer them without looking back at the chapter, then check the key. Anything you miss, re-read that section rather than just reading the answer — the arithmetic in this chapter only sticks if you have done it.

Multiple choice

1. Which of the following consumes cash but never appears on a profit-and-loss statement?

  • A. Interest on a term loan
  • B. Repayment of loan principal
  • C. Rent expense
  • D. Credit-card processing fees

2. The cash conversion cycle is:

  • A. DIO + DSO + DPO
  • B. DIO − DSO + DPO
  • C. DIO + DSO − DPO
  • D. DSO − DIO − DPO

3. Bellwether's working-capital reserve on opening day is $8,700 rather than the budgeted $45,000 because:

  • A. The owners took a distribution before opening
  • B. The construction contingency was overspent
  • C. Chapter 9's honest pre-opening build came to $71,300 against a $35,000 budget
  • D. The tenant-improvement allowance was reduced

4. At $48,933 of monthly fixed obligations, $8,700 of cash represents approximately:

  • A. 5.3 days of runway
  • B. 12.4 days of runway
  • C. 27.6 days of runway
  • D. 62.1 days of runway

5. A mature restaurant on net-30 terms typically has a cash conversion cycle that is:

  • A. Strongly positive, because inventory turns slowly
  • B. Negative, because the guest pays before the vendor invoice comes due
  • C. Exactly zero, because payment is instantaneous
  • D. Undefined, because there are no receivables

6. Passing up a 2/10 net 30 discount costs approximately what annualized rate?

  • A. 2%
  • B. 12%
  • C. 24%
  • D. 37%

7. In Bellwether's thirteen-week forecast, the balance closes negative in:

  • A. Week 1
  • B. Week 2
  • C. Week 4
  • D. Week 9

8. Bellwether's first February falls in month eleven because:

  • A. The lease commences in February
  • B. The restaurant opens the first Tuesday in April
  • C. The fiscal year begins in April
  • D. The abatement runs eleven months

9. A biweekly payroll produces how many disbursements per year, and what does that imply?

  • A. 24; every month has exactly two
  • B. 26; twice a year a month contains three
  • C. 26; the extra two land in December
  • D. 52; one every week

10. In January, Bellwether remits December's sales tax of $11,088 while collecting only $7,959 of its own. This produces:

  • A. A $3,129 favorable swing
  • B. A $3,129 adverse swing in the year's second-weakest revenue month
  • C. No cash effect, because sales tax is netted
  • D. A reduction in February's remittance

11. Which is the correct instrument for funding seasonal working-capital swings?

  • A. An SBA 7(a) term loan
  • B. An equipment lease
  • C. A revolving line of credit
  • D. A merchant cash advance

12. The clearest sign that a line of credit has become unamortized term debt is:

  • A. The interest rate is variable
  • B. The balance has not returned to zero in twelve months
  • C. The facility is personally guaranteed
  • D. The commitment fee is charged on the undrawn portion

13. Bellwether's beverage inventory is roughly 70% of inventory dollars and turns about five times a year. The correct operational reading is:

  • A. The bar is over-ordering and should be cut immediately
  • B. Beverage inventory is capital parked, not working inventory, and it dominates days inventory outstanding
  • C. Wine inventory is a receivable
  • D. Beverage inventory does not affect the cash conversion cycle

14. Which of these is the earliest reliable warning sign of a cash problem?

  • A. A missed payroll
  • B. A vendor credit hold
  • C. Days payable outstanding rising while sales are flat
  • D. A declined card at the bank

15. February shows $10,694 of profit and a $10,954 decline in cash. The largest single contributor to the divergence is:

  • A. Debt principal repayment
  • B. Inventory build
  • C. Periodic items paid in February but expensed across the year
  • D. Payroll timing

16. Chapter 29's event terms — 25% at signing, 50% at thirty days, balance on the night — mean that, from a cash perspective:

  • A. An event cover finances you; an à la carte cover is financed by you
  • B. Events have worse cash characteristics than walk-ins
  • C. Deposits should be recognized as revenue when received
  • D. Event receivables have no effect on working capital

Short answer

17. In one sentence each, name the four structural wedges between profit and cash described in §33.1.

18. Bellwether's thirteen-week forecast ends at $42,598. Two deductions bring "genuinely free cash" to $24,855. Name them and their amounts.

19. What is the difference between the trough of a cash forecast and the ending balance, and which one sizes a credit facility?

20. Explain in two sentences why a restaurant's bank balance systematically overstates its position, and name three specific components of the overstatement.

21. Bellwether's Q1 runs 66.6% prime cost on $363,100 of sales. Show why weeks 14–52 must average 58.0% prime for the annual plan to hold.

22. Three of Bellwether's five February dinner services run below the Chapter 32 cash break-even of 77 covers. Name them with their cover counts, and explain why the 87-cover weekly average conceals this.

23. State the three rules of line-of-credit discipline from §33.8.

24. Chapter 34 identifies $53,122 of annual leak exposure against $4,849 of controls. Express that relationship three ways: as a return per dollar spent, as days of Bellwether's fixed obligations, and as a share of the $56,375 working-capital shortfall.

Answer key **1. B.** Principal repayment reduces a liability; only the interest portion is an expense. Bellwether's year-one debt service of $69,500 splits roughly $39,000 interest / $30,500 principal. **2. C.** CCC = DIO + DSO − DPO. **3. C.** The $36,300 gap between the $35,000 pre-opening budget and Chapter 9's $71,300 bottom-up build had exactly one place to come from, and it was the reserve. **4. A.** $8,700 ÷ $48,933 = 0.178 months × 30 = 5.3 days. (The full $45,000 would have been 27.6 days; the $101,375 bottom-up requirement is 62.1 days.) **5. B.** Fast inventory turns and near-instant collection against 30-day payables produce a negative cycle — the vendor finances the restaurant. **6. D.** (0.02 ÷ 0.98) × (365 ÷ 20) = 37.2%. **7. B.** Week 2, at negative $7,442, driven by the first biweekly payroll of $24,200 landing against weeks 1 and 2 of deliberately restricted opening volume. **8. B.** April opening + ten months = February as month eleven. **9. B.** 26 disbursements against 24 month-halves, so twice a year a month carries three. At Bellwether's plan volume that is an extra $19,231 of cash out, with no change to the P&L's labor line, which accrues to days worked. **10. B.** $11,088 − $7,959 = $3,129 adverse, in January. **11. C.** A revolver. A term loan funds assets; an equipment lease funds a specific asset; a merchant cash advance is the sale of next season at a discount. **12. B.** If it never cleans up, it is term debt with no amortization schedule and a variable rate — a worse product than the term loan you would have negotiated deliberately. **13. B.** Beverage inventory is $19,300 of $27,700, with a DIO of 73.7 days against food's 9.2. It dominates the blended 23.5 days. **14. C.** DPO is a rate and measures behavior; a bank balance is a level and can be propped up for weeks by the very behavior DPO detects. **15. C.** $17,350 — the NNN reconciliation, insurance renewal and workers' comp audit, license renewals, and compressor service, all paid in February and expensed across the year. Principal ($2,742) and inventory build ($1,270) are much smaller. **16. A.** Events collect before you cook; à la carte covers are financed by you — you bought the protein eleven days ago and the guest pays at 9:40 p.m. **17.** (i) Debt **principal** is a balance-sheet transaction, not an expense. (ii) Owner **draws** come out of equity and never touch the P&L. (iii) **Inventory build** — COGS is usage, not purchases, so every dollar the walk-in deepens is cash the P&L never records. (iv) **Timing** — insurance installments, NNN reconciliations, biweekly payroll against calendar months, and monthly sales-tax remittance all move money on dates the accrual period ignores. **18.** June sales tax of $9,443, collected and remitted July 20 — a trust-fund liability, never the restaurant's money. And $8,300 of week-13 payroll, earned by employees and disbursed in week 14. $42,598 − $9,443 − $8,300 = $24,855. **19.** The trough is the *minimum* projected balance across the horizon; the ending balance is the value on the last day. The trough sizes the facility. A forecast can end at $60,000 and still require borrowing, because you have to survive the middle. **20.** Because a restaurant collects instantly and holds other people's money in the same account. The overstatement includes sales tax collected but not remitted, event deposits for events not yet catered, gift-card liability not yet redeemed, and payroll accrued but not yet disbursed — and the overstatement is largest on the days the balance looks healthiest. **21.** Q1 prime = 0.666 × $363,100 = $241,825. Annual prime = $930,280. Remaining prime = $930,280 − $241,825 = $688,455. Remaining revenue = $1,550,000 − $363,100 = $1,186,900. $688,455 ÷ $1,186,900 = 58.0%. **22.** Tuesday at 46 covers (31 short), Wednesday at 58 (19 short), and Thursday at 74 (3 short). Friday's 118 and Saturday's 139 pull the weekly average to 87, which is why an average is the wrong instrument for a question about whether individual services cover the cash the building consumes. **23.** (i) The line must clean up — the balance returns to zero at least once every twelve months. (ii) Never fund an operating loss with a revolver; if the drawn balance is not repaid inside the thirteen-week horizon, you have a P&L problem, not a timing problem. (iii) Draw on a written schedule with stated triggers, not on a feeling. **24.** $53,122 ÷ $4,849 = **11.0 dollars of exposure closed per dollar spent.** $53,122 ÷ $48,933 × 30 = **32.6 days** of fixed obligations. $53,122 ÷ $56,375 = **94%** of the working-capital shortfall.