Question

Pasti Berhad values advertise and sell residential property on behalf of its customers. The company has been in business for only a short time and is preparing a cash budget for the first four months of the year 2020. The expected sales of residential properties are as follows.

Year	2019	2020	2020	2020	2020
Month	December	January	February	March	April
Units Sold	10	10	15	25	30

The average price of each property is RM180,000 and Pasti Berhad charges a fee of 3% of the value of each property sold. Pasti Berhad receives 1% in the month of sale and the remaining 2% in the month after sale. The company has ten employees who are paid monthly. The average salary per employee is RM36,000 per year. If more than 20 properties are sold each month, each employee will be paid in that month a bonus of RM1,500 for each additional property sold.

Variable expenses are incurred at the rate of 50% of the value of each property sold and these expenses are paid in the month of sale. Fixed overheads of RM44,300 per month are paid in the month in which they arise. Pasti Berhad pays interest every three months on a loan of RM200,000 at a rate of 6% per year. The last interest payment in each year is paid in December.

Outstanding tax liability of RM95,800 is due to be paid in April. In the same month, Pasti Berhad intends to dispose of surplus vehicles, with a net book value of RM15,000, for RM20,000. The cash balance at the start of January 2020 is expected to be a deficit of RM40,000.

Required:
a) Prepare a monthly cash budget for the period from January to April. Your budget must clearly indicate each item of income and expenditure, and the opening and closing monthly cash balances.
b) Discuss the factors to be considered by Pasti Berhad in planning ways to invest any cash surplus forecast by its cash budgets.
c) Discuss the TWO (2) advantages and TWO (2) disadvantages to Pasti Berhad of using overdraft finance to fund any cash shortages forecast by its cash budgets.

Answer 1

Ans.A.

Cash Budget for January to April,2020 (all fig. in RM)
	January	February	March	April
Cash balance at the beginning of the period	-40,000	-960,300	-2,321,600	-4,624,900
Cash inflows:
1% fee received for same month	18,000	27,000	45,000	54,000
2% fee received for previous month	36,000	36,000	54,000	90,000
Disposal of surplus vehicles				20,000
Total cash inflows	54,000	63,000	99,000	164,000
Cash outflows:
Employee Salaries	30,000	30,000	30,000	30,000
Employee bonus			75,000	150,000
Variable expenses	900,000	1,350,000	2,250,000	2,700,000
Fixed overheads	44,300	44,300	44,300	44,300
Interest on loan			3,000
Tax liability				95,800
Total cash outflows	974,300	1,424,300	2,402,300	3,020,100
Cash surplus(deficit) at end of period	-960,300	-2,321,600	-4,624,900	-7,481,000

Working notes:

1. The fee charged by Company is 3% of the value of property and the average price of property is RM180,000. So, fee charged per property = 3% * RM180,000 = RM5,400. Total fee earned each month = No. of units sold in that month * RM5,400. Further, 1% fee is collected in the same month and balance 2% is collection in the following month. So, cash collections projected for each month are as follows:

Year	2019	2020	2020	2020	2020
Month	December	January	February	March	April
Units Sold	10	10	15	25	30
Total 3% fee per property(RM)	5,400	5,400	5,400	5,400	5,400
Total fee earned for all units sold(RM)	54,000	54,000	81,000	135,000	162,000
1% fee received in same month(RM)	18,000	18,000	27,000	45,000	54,000
2% fee received in following month(RM)		36,000	36,000	54,000	90,000	108,000

2. The surplus vehicle is expected to be disposed in April for RM20,000 cash. So, cash inflow is recorded for it.

3. Average salary per employee per year = RM36,000. So, per month = RM36,000/12 = RM3,000. Salary per month for 10 employees = RM3,000*10 = RM30,000.

4. Bonus is paid to all 10 employees in the month in which more than 20 properties are sold at the rate of RM1,500 per additional property sold. Since the units sold exceed 20 only in March and April, bonus is payable only in those months. Bonus for March = (25-20)*RM1500*10 = RM75,000. Bonus for April = (30-20)*RM1500*10 = RM150,000.

5. Variable expenses are incurred at the rate of 50% of value of each property sold. So, variable expense per unit = 50% * RM180,000 = RM90,000.Variable expenses for each month = RM90,000*No. of units sold in that month.

6. Interest on loan RM200,000 at 6% per year is paid every three months and was last paid in December. So, interest payable in March = RM200,000*6%*3/12 = RM3,000.

7. Cash Surplus(Deficit) = Opening balance of cash + Cash inflows – Cash outflows.

8. Opening balance of cash = Closing balance of cash of previous month.

Ans.B. There are no cash surplus expected as per cash budget prepared.

Ans.C. The advantages of using overdraft facility for financing cash deficits are:

1. It can use the funds procured for planned activities which would otherwise be required to be foregone in the absence of funds.

2. Overdraft allows you to withdraw as per need upto certain limit and interest is charged only on the sum withdrawn. So, it is better than fixed term loan.

The disadvantages of using overdraft facility include:

1. It is an additional cost in the form of interest on amount overdrawn.

2. The additional cost in the form of overdraft fee/interest is not been used for new investment/expansion but only to finance working capital needs, which means the Company is not growing.