The table below shows an online bicycle repair business's cash position in its first four months. Its owner is deciding whether to use an overdraft to cover...
Question 1 Report
The table below shows an online bicycle repair business's cash position in its first four months. Its owner is deciding whether to use an overdraft to cover short periods when costs are greater than cash received from customers.
| Month | Cash received from sales ($) | Cash paid out ($) |
|---|---|---|
| April | 1,900 | 2,600 |
| May | 2,500 | 2,200 |
| June | 3,100 | 2,700 |
| July | 3,400 | 2,900 |
(a) Identify the month in which an overdraft is most likely to be needed. [1]
(b) What is an overdraft? [1]
(c) Explain one disadvantage to the business of using an overdraft for a long period. [2]
Answer Details
(a) An overdraft is most likely to be needed in April, when cash received is $1,900 but cash paid out is $2,600. This creates a $700 shortfall. [1]
(b) An overdraft is permission from a bank for a business to withdraw more money than it has in its account, creating a negative bank balance. [1]
(c) Interest is charged on an overdraft. If it is used for a long period, the interest increases business costs, reducing profit and the cash available for other purposes. [2]
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