A few years ago Sarah started a business making cookies, cakes, and biscuits and supplying them to coffee shops and cafés. The business has always been profitable, and during 2011 it diversified into the production and sale of cookie- and bread-making kits. This seems to have been a successful venture as the business showed a significant increase in its profits. However, in 2011, a bank overdraft was needed for the first time.

REQUIRED:
Using Table 7.11, explain to Sarah what has happened during 2011 to cause the company’s bank account to become overdrawn, and make suggestions as to how it can improve its cash flow position in the future.

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Table 7.11 Biscuit Barrels Statement of cash flows for the year ended 31 December 2011 $ Cash flows from operating activities Profit for the year Add: Depreciation 126,500 11,400 137,900 Working capital movements Less: Increase in inventories (21,120) Less: Increase in trade receivables (7,310) Add: Increase in trade payables 4,040 Cash generated from operations 113,510 Cash flows from financing activities Repayment of loan (50,000) Dividend paid (31,000) Cash flows from investing activities Purchase of equipment (72,000) Proceeds from sale of equipment 18,770 Net decrease in cash (20,720) Cash balances at 1 January 2011 Cash balances at 31 December 2011 15,480 (5,240)