An examination of up to three reasons is adequate for maximum marks.
a) Cash Flow estimate for Cottam Stationers Aug
|
|
Sep
|
Oct
|
Nov
|
|
Cash sales
|
2000
|
5000
|
2000
|
3000
|
|
Stock purchases
|
1000
|
2500
|
1000
|
1500
|
|
Rent
|
0
|
2000
|
0
|
2000
|
|
Utilities
|
500
|
500
|
500
|
500
|
|
Other costs
|
2000
|
1000
|
1000
|
1000
|
|
Total outflow
|
3500
|
6000
|
2500
|
5000
|
|
Opening cash balance
|
5000
|
3500
|
2500
|
2000
|
|
Net cash flow
|
(1500)
|
(1000)
|
(500)
|
(2000)
|
|
Closing cash balance
|
3500
|
2500
|
2000
|
0
|
b) Definition of liquidity problem, i.e. the degree to which Cottam Stationers can meet its short term debts. The firm seems to be suffering from deterioration liquidity as seen by the closing balance figures. The net cash flow for the first four months of trading is also negative suggesting the firm has inadequate working capital.