Reference no: EM132456278

The directors of Sawburn plc have decided to investigate ways in which they might improve their management of short and medium term finance. The company's business involves irregular inflows and outflows of cash. The directors have tended not to rely on bank overdraft in order to deal with cash shortages, preferring to use short fixed term loans instead. They are now considering a change to this policy because of the greater flexibility of overdraft finance. They have decided that this might reduce finance costs because interest is only paid on overdrafts on the amount by which the account is actually overdrawn.

Describe the factors that the directors should take into account in making this change of policy and explain whether overdraft is likely to be the most suitable form of short term finance in these circumstances. Your answer should make appropriate references to the alternatives to overdrafts.