Instructions: Read the case study and answer the questions that follow.

Coffee Call is a small, independent coffee shop. It is run by two brothers, Erin and Carl Shutter. They are keen to increase sales by using the shop space more effectively and installing three new tables. This will, however, require a significant investment and the brothers have approached the bank with a business plan for the expansion with the aim of securing loan finance. The brothers have also been approached by a venture capitalist who is willing to fund the expansion in return for a 20% stake in Coffee Call. The brothers are concerned to keep the liquidity of the business secure during the expansion.

The following cash-flow data have been produced by Coffee Calls accountant for the period January to June.

• Sales for the first three months of the year will be $20,000, rising to $40,000 in the following three months once Coffee Call has installed the extra seating.

• Material costs are 50% sales and are paid each month.

• Electricity and gas cost $4,000, with half paid in February and the remainder in September.

• Staff wages of $2000 are paid each month, but this will rise to $3000 after three months once Coffee Call has expanded

• Erin and Carl withdraw $10,000 each out of the business in March and December.

• Marketing costs of $500 are paid each month.

• A loan of $20,000 is taken out in February to fund the expansion.

• The $20,000 costs of fitting the new tables is paid in March.

• The brothers believe the tables can be fitted in three days without any disruptions to sales.

• The opening cash balance is $7000.

1. Define the term liquidity. [2]

2. Construct a cash-flow forecast for Coffee Call for the first six months of the year. [4]

3. Discuss whether Coffee Call should use the venture capitalist as a source of finance. [4]