11.9 Horst is in business as a sole trader, trading under the name of Box Distributors. His accountant has prepared a profit and loss account for the business for the year ending 31 December 20X5 and a balance sheet at that date. Horst approaches you in your capacity as a small business adviser. He shows you the financial statements and says:

1 can't quite understand what's happened here. My sales for 20X4 were £600227 and they've increased this year to £636 636. The business is really doing quite well. I had to replace one of the delivery vehicles during the year, because it was unreliable, but I thought I'd been quite sensible about covering that spending. I got £5200 for it and extended the long-term bank loan by another £5000 which should have more or less covered the cost of the new van, which was £10 660. I've made a big effort to control my own spending - I decided not to replace the BMW this year, and we went camping in France instead of going on that luxury cruise we'd planned. So, drawings are only slightly higher than they were in 20X4. Despite all this restraint the overdraft was almost £8000 at the year end. What's happened?

Horst's profit and loss account for the year ending 31 December 20X5 and his balance sheets at 31 December 20X5 and 20X4 are shown below.
Box Distributors: Profit and loss account for the year ending 31 December 20X5 £
Sales 636 636 Less: cost of sales (452 483)
Gross profit 184153 Selling and distribution expenses (excluding depreciation)
(62 466)
Administration expenses (excluding depreciation)
(55 892)
Depreciation of delivery vehicles (6 313)
Profit on sale of delivery vehicle 336 Depreciation of warehouse and machinery (11 876)
Operating profit 47 942 Interest paid (2 104)
Net profit 45 838 Box Distributors: Balance sheets at 31 December 20X5 and 31 December 20X4 20X5 20X5 20X4 20X4 £
£
£
£
Fixed assets Delivery vehicles at cost 35 897 33 650 Less: accumulated depreciation (16 960)
18 937 (14196)
19 454 Warehouse and machinery at cost 1 18 760 1 18760 Less: accumulated depreciation (71 256)
47 504 (59 830)
59 380 66 441 78 834 Current assets Stock 52 687 45 611 Debtors and prepayments 78 490 65 442 Cash at bank —
371 131177 111 424 Current liabilities Overdraft 7 996 Creditors and accruals 39 943 42 417 47 939 42 417 Net current assets 83 238 69 007 149 679 147 841 Long-term liability - loan (15 000)
(10 000)
134679 137 841 Capital Capital brought forward 137 841 128 069 Profit for the year 45 838 58 222 Drawings (49 000)
(48450)
134 679 137 841 A detailed analysis of the delivery vehicle accounts shows the following:
Cost £
Delivery vehicles at 1 January 20X5 33 650 Disposal of vehicle (8413)
Addition of vehicle 10 660 Delivery vehicles at 31 December 20X5 35 897 Accumulated depreciation At 1 January 20X5 14196 Accumulated depreciation on disposal (3 549)
Depreciation charge for year (to profit and loss account) 6313 At 31 December 20X5 16 960 You are required to prepare a cash flow statement for Horst's business for the year ending 31 December 20X5. Also, write a brief letter to Horst explaining the main reasons for the overdraft, offering advice on how he might go about eliminating it.