Assess whether The Pie Shop plc should increase its bank loans if it is faced with future cash flow problems. [10]
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Always start with a definition.
Cash flow refers to the flows of money into and out of a business over a period of time.
A
cash flow problem suggests that outflows are excessively large and putting a strain on
the finances of the business.
Your answer should be 'two sided' with a conclusion.
Sample paragraph: Yes - bank loans will help this situation.
If agreed a bank loan will be quickly paid into the companies bank account.
The benefit of this is that the company is unlikely to exceed any agreed overdraft limit.
This is positive for the company because if it did exceed the overdraft limit it would face very large charges and could face the possibility of the bank asking for all of the overdraft back.
If this happened and there was no other source of finance available the business would technically be insolvent and would be forced to stop trading.
Sample paragraph: No - bank loans will not help this situation in the long run.
Any bank loan will have to be paid back with interest. The financing costs of a loan are therefore not available for other aspects of the company's operations.
This is a disadvantage to the company because as it operates in a very competitive market - customers are very fussy when it comes to food and if the stores begin to look run down or the quality of the ingredients begins to suffer then customers will quickly go elsewhere.
I feel that in the short run a loan may resolve any immediate cash flow problems but in the long run the directors of the business must address the underlying issue of how profitable the business is.
As providing a high quality experience is part of the USP for this business then cutting costs is not an immediately obvious solution.
The business should seek to maximise revenue. It could do this through promotional activity such as having live music in the restaurants. This works very well for Pizza Express and there is no reason why it should not for The Pie Shop.
As providing a high quality experience is part of the USP for this business then cutting costs is not an immediately obvious solution.
The business should seek to maximise revenue. It could do this through promotional activity such as having live music in the restaurants. This works very well for Pizza Express and there is no reason why it should not for The Pie Shop.
