Essay
Unit 5: Business Accounting M1 and D1
- Course
- Institution
M1- analyse the cash flow problems a business might experience. D1-justify actions a business might take when experiencing cash flow problems.
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Amelia Gruner-Overgaard M1/D1- Paula HusbandA cash-flow forecast estimates the amount of inflow to the business bank account and the outflow from
the business bank account in a set time frame. This will help the business decide whether they need to
cut their costs, borrow money, buy more machinery etc.
On the other hand is a cash-flow statement, which is a summary of the actual monetary happenings
within the business. It shows how much revenue and expenditure there is every month. This can help
the business as it is historical data they can look back on to see what months the business did well or
not.
There are many reasons why businesses would experience cash-flow problems. Firstly, low profits or
worsened losses could slowly lead the business into insolvency, meaning they can’t afford to maintain
the costs of the business.
Another reason for cash-flow problems could be investing too much money into production equipment
which isn’t regularly used; this is wasted cash which isn’t generating revenue for the business.
Holding stock which has been brought out of the business account ties up cash which can’t be spent in
other areas which might be necessary. This stock might become unable to sell if it goes out of date etc.
which will cause problems to the cash flow if money has been spent and no profit is made from it.
Credit terms are used by customers who don’t pay for the products straight away. If customers don’t
meet the deadline to pay for products it can put a strain on the business cash-flow, as the business won’t
have the income they expected which could’ve been used to pay for stock or new machinery.
Seasonal demand can put a strain on the cash-flow, such that seasonal items like ice cream would have a
high demand in summer and a lower demand in winter. Profits would be less in winter so businesses
need to maintain their costs during this period as it could cause them to become insolvent if the
business isn’t making enough profit to cover the costs.
Initially the opening balance for ‘SIGNature LTD’ is zero, which means Sharma and Ryan have no money
to fall back on in case they get into any debt or if they need to increase their expenditure. However, they
do have an overdraft balance of £20,000 which they can access. On the other hand, if Sharma and Ryan
do go into their overdraft within the first year they will already be increasing their business debt, so they
would need to increase their profit to control this. Alongside the overdraft comes a 1.5% interest, by
borrowing money from the bank they are increasing the business debts even more. For example if
Sharma and Ryan use £10,000 of the overdraft in January, they will be paying £150 every month until
they reduce the amount borrowed through their overdraft.
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