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Answer To: Chief Accountant From: Assistant Accountant Date: XXXXXX Subject: Bank borrowing The business is expecting a cash

shortfall of $52,000 in August, but we currently have an overdraft facility for just $25,000. W therefore urgently need to take steps to improve liquidity. Since actual cash flows could turn out to be worse than forecast, we should plan for a liquidity requirement of at least $55,000. A large part of the cash shortfall ($20,000) will be caused by spending on capital equipment in August. Even if this spending is cancelled or deferred, we will still exceed our current overdraft limit in August. We must therefore arrange to increase our borrowing. 1. South Bank has offered an overdraft limit of $50,000 if we switch our account. However, unless we cut back on payments or improve receipts, this will not be enough to cover the shortfall in August. 2. We have not yet made any approach to North Bank. In view of our relationship with North Bank, it would be advisable to discuss with the bank whether it would agree to provide extra funding, perhaps as a combination of a $20,000 loan to finance the capital spending (possibly secured) and an increase in the overdraft limit to, say, $35,000 or $40,000. This request will test the strength of our relationship with North Bank. 3. We should also consider ways of improving cash flows, by improving receipts from collections or reducing payments. 4. If we cannot arrange for more borrowing through North Bank, reaching an agreement with South Bank could be essential, although some of the planned capital spending might have to be deferred.