Introduction to Accounting Essay
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When experiencing cash flow problems there are a few recommendations to make, these problems include:
• Being overdrawn on consecutive months. • Having too much money • Difficulty in predicting costs
When being overdrawn on consecutive months you should look to cut back on immediate expenses such as insurance, suppliers, rent and employees. You could also increase product prices however you have to bare in mind whether the customers will pay that little bit extra to pay for the product. Another option, but more risky, is to gain more credit from creditors but this will bring interest costs and adds another liability for the future.
When having too much money in a cash flow you should reinvest the capital back into the business in order to advance in technology, assets or staff. This will help the company move forward and improve the service offered to consumers. Another option is to put the money in a savings account, premium bonds or shares. This will provide more interest on your money and let it grow instead of letting it just sit around gathering dust.
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The final problem, difficulty in predicting cash flow costs, should be resolved by asking your sale assistants, doing market research or asking an experienced accountant for guidance. You should ask your sale assistants because they are the people on the ground floor and know what’s going on, what the customers like and what products fly off the shelf. They have first hand knowledge on the company as they process the day to day dealings whereas a manager might not always be around. Doing market research will help to find the average prices of all products or services such as insurance, this will ensure you will get the best quote and avoid under predicting the costs for that month. Just to be certain, you can then go and ask an accountant for guidance as they are experts in the field and will have knowledge on how to spread the costs across the period.
If we take a look at Alan’s business selling watches and jewellery over a twelve month period we will be able to see an example of cash flow. His market is a very expensive one to get set up in as a business and the cash flow scale will be larger compared to a newsagents cash flow as the items cost more to buy in and sell for more. This gives more risk of Alan becoming overdrawn.
Alan’s Closing Balances
Alan’s closing balances are decent apart from one month, September, where he had a rough time in financial terms. He went overdrawn by £2,878 and received an overdraft interest charge of a further 10% resulting in a total of £287 divided by 12 to give the separate monthly interest charge of £23.98. This isn’t so bad if you look at it as separate month but if Alan was to keep going overdrawn this figure would rapidly rise to something greater. All the other months have a healthy closing balance ranging from £332 right up to a strong £10,545. The 12 month average for Alan’s closing balance is 4533.88 which is a secure figure.
There are many trends within Alan’s cash flow forecast such as the amount of drawings he intends to take out per month. This figure, although an estimate, may not be realistic as he may have to spend out on more one month therefore affecting the chance of becoming overdrawn. Another trend of the chart is the constant advertising cost rate of £175 up until September. It would be wise to increase the advertising fee a bit higher in the month of January as this is a key time to be offering sales and to get rid of unwanted stock that didn’t sell the year before. Judging by the cash flow forecast Alan may have acquired a fixed mortgage of £950 per month; this is good that he has got a fixed mortgage as he doesn’t want any sudden changes in expenses as he could be losing money. There is a clear trend in the business rates paid out of the business and this is similar for the amount paid on insurance. The ‘mode’ (or most often amount) of sales for Alan’s business is 37,800 and the mode for cash purchases was £27,000.
Problems within Alan’s predicted Cash flow forecast
• Low sales in August • High mortgage payment • High advertising costs in November and December • Rent income is quite low
Causes of Problems and Alan’s Plans
The cause of the low sales in August was due to the small amount purchased in comparison to other months. With not a lot of stock purchased Alan can only make a limited amount of sales and with a limited amount of money coming in and a consistent amount of money having to payed out, such as the mortgage, business rates etc., maybe this month was the cause for having an overdraft the following month in September. In September there was a low amount brought forward, only £561, which made things harder that month.
The high mortgage payment probably cannot be helped as it is probably caused by the location of Alan’s shop; in a city centre the prices for rent and mortgage are considerably higher. Alan could have either bartered for a better deal when first viewing the mortgage contract or looked around the country for different locations that aren’t so expensive but still have a good target market in their area of influence.
The cause of high advertising costs in November and December is understandable as it is the festive season where everyone is spending to buy gifts for one another and it is crucial to get your businesses name out ahead of competition. This is probably money well spent as Alan saw the biggest amount of sales in both these months but this doesn’t mean he has to spend high amounts of money all the time. There are different ways of advertising that are financially cheaper. These include press releases to newspapers, interviews with journalists, blogging on multiple online websites and going into radio stations for interviews there. All of these promote Alan’s business and all at a cheaper price.
The rent income should really be looked at as an added bonus but if you can get more out of the tenants then Alan should look to increase the income of the rent for his room above the shop. This added amount of income will more than likely not go down well with the current tenant and he or she may leave but there are many people looking for flats and one that is based in a city centre is convenient for people to get to work, this added source of income will help out Alan’s cash flow well and hopefully avoid going overdrawn in the future.