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Unit 5 D1 - example of how a business may deal with cash flow problems.

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Introduction

D1: Suggest a solution that the business could use to resolve each problem. If a business has some cash flow problems then they have some solutions as: Overdraft agreements: A business with a fluctuating cash flow cycle should be able to show the forecast to the bank and make arrangements for periods of negative cash flows. Banks sometimes offer free overdraft facilities to help businesses through these periods, but only if pre-agreed. Going overdrawn on a bank account without an agreement with the bank can be a very expensive option. Overdrafts allow allows the business to make essential payments whilst chasing up their own payments, along with helping to maintain cash flow, only need to borrow what you need at the time. Overdrafts are easy and quick to arrange, providing a good cash flow backup with the minimum hassle. In the meanwhile it has its bad effect as well. Overdrafts carry interest and fees; often much higher rates than loans, which makes them very expensive for long term borrowing; the business can also face large charges if they go over the agreed overdraft time period. Unless mentioned in the terms and conditions, bank can recall the entire overdraft at any time, this is due to fall to make other payments, or if broken terms and conditions; though sometimes the banks change their policies. ...read more.

Middle

In this month the owner could have negotiated terms with the creditors. They could make agreements that they will buy shelves and rails but they won’t pay them all the money in this month. They will pay them during the upcoming months in certain amount of cash. The owner of the business should have had calculated it before. He should have had seen his cash available and then spent money according to that. In the month of August the business had a negative opening balance. They did not spend any money on any other equipment due to which the closing balance was positive as £680. In this month they did not face any sort of negative balance. They had an overdraft of £5.00. If the business had the overdraft agreement then the bank would have given them the money which they did not even have to pay back. This could sort their cash flow problem for them. In the month of September the opening balance was positive. They spent £3000 on computer equipment and in the same month they also spent £350 on light and heat. By the end of the month their closing balance was -£1755.60 which was negative that was because the total cash available to them was £13118.40 but the total outflows turned out to be £14874.00. ...read more.

Conclusion

Good contacts with creditors could help the business a lot as this was the time when the business was not doing well so if they had good contacts with the creditors, the creditors might tell them to pay them with few of these things later or they might help them and lend them some money so they can cope with the expenses in the business and later when the business is in the state of returning them back the owner can return the money back to them. In the month of November the opening balance was negative. The total cash available was £12623.19 and the cash outflow was £12241.37 which led them to a positive closing balance of £381.82. They did not spend any cash on any equipment which showed them a positive closing balance by the end of the month. The business faced £83.01 as an overdraft. The bank could help the business through the overdraft agreement if the business had made any. In the month of December the opening balance was positive. The total cash available was £14373.33 and the total outflow was £12994.69. They spent £500 on light and heat but still ended up with a closing balance of £1378.64. This meant that by the end of the year the business did not have any negative balance. The business did well over the year. ...read more.

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