By referring to the statement of cash flows in Table 7.4, answer the following questions:

a) Explain why the business has an overdraft at 31 December 2013 despite all its fundraising activities and the profit made during the year?

b) What steps could Sam take to ensure that the business’s overdraft does not continue to grow?
As a result of Sam’s better understanding of working capital management, he resolves to keep his inventory holding to a minimum and to avoid making any significant capital expenditure in 2014.

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Table 7.4 Smart Sports Ltd Statement of cash flows for the year ended 31 December 2013 Cash flows from operating activities Profit for the year Add: Depreciation 30,902 20,208 51,110 Working capital movements Less: Increase in inventories (18,800) Less: Increase in trade receivables and prepayments (14,690) Add: Increase in trade payables and accruals 14,510 Cash generated from operations 32,130 Cash flows from investing activities Purchase of property, plant, and equipment (96,000) Cash flows from financing activities Proceeds of share issue 30,000 Proceeds of loan issue Net decrease in cash 12,000 (21,870) Cash balances at 1 January 2013 11,440 Cash balances at 31 December 2013 (10,430)