Question

6. Cash flow

You are planning to set up a new business with a partner, KU Enterprises, on 1 June 2020. You will each own 50% of the business and you will both work in the business. You estimate that your first 6 months in business will be as follows:

1. Sales, all on credit, will be £20,000 for June increasing by £5000 per month each month. You are giving your customers one month’s credit to encourage them to buy from your new business, so they will pay one month after receipt of the goods.
2. You will buy £15,000 of goods on the 3^rd of June as inventory paying for it immediately out of the bank.
3. From June onwards you will buy inventory goods each month costing 30% of the sales revenue figures. Your creditor is giving you one month’s credit on these purchases.
4. You will rent a van with a deposit of £5000 paid on July 2^nd and 36 monthly payments of £500, which will start on 27^th August and be paid on the 27^th of each month after that.
5. You buy a five year lease on a property for £65,000 with an option to renew after 5 years.
6. Insurance of £2400 per annum will be paid in two six monthly instalments with the first payment on 1^st June.
7. Annual Business rates of £3600 will be paid by monthly by direct debit on 28^th of the month starting in June.
8. You and you partner will take drawings of £1500 each every month by cash.
9. You and your partner will put £25,000 capital investment each into a bank account for the business on 1 June to cover initial expenses.

You are required to:

1. Draw up a cash budget month by month for the first 6 months showing clearly the amount of bank balance or overdraft at the end of each month. Use the template Appendix C to complete your answer using this template and include it in your MS Word answer document.
2. Identify the months, if any, when the business will require additional funds.
3. What is the maximum amount that the business needs to avoid cash flow problems?
4. Suggest solutions to the business’s cash flow problems.  
5. What effect would an increase of material costs of 25% have on the cash flow.

Appendix C. Refers to Question 6

Complete your answer using this template and include it in your MS Word answer document.

KU Enterprises Cash Balance Position June - November 2020	June	July	August	September	October	November
Opening Bank Balance	0
Cash In
Capital Investment
Revenue from customers
Total Cash Out
Cash out
Total Cash out
Net monthly cash flow
Closing Bank Balance

Answer 1