Question

DeLux Brothers (Pty) Ltd intends to expand its Palapye based operations by acquiring a new plant. The Finance Manger has been asked by the owners of the company to prepare cash flow forecasts for the business for the period December 2017 to May 2018. The marketing department has prepared the following forecasts.

Month                                            Sales BWP

October 2017 – Actual                   180 000

November                                      180 000

December                                      360 000

January 2018                                 450 000

February                                        500 000

March                                            360 000

April                                              360 000

May                                              280 000

Collection estimates from the credit department are as follows:

Collections within the month of sale (cash sales) – 10%

Collection in the month following the sale – 75%

Collection in the second month following the sale – 15%

Total labour and raw materials costs are estimated for each month as follows:

Month                                               BWP

December 2017                              216 000

January 2018                                 270 000

February                                       300 000

March                                           250 000

April                                              216 000

May                                              168 000

General and administrative expenses will amount to approximately P27 000 per month, lease payments will amount to P9 000 per month; depreciation will be P34 000 per month; miscellaneous payments will be 2 700 per month; income tax payment of P300 000 will be due in March 2018 and a deposit of P180 000 on a new vehicle will be required in December 2017. The bank charges interest on overdraft of 7% (assume the interest is charged on closing balance for the previous month). The cash balance at the end of November will be P40 000.

Required:

a) Prepare a cash budget for the period December 2017 to May 2018

b) Briefly outline any five advantages of a zero based budgeting (ZBB)

Answer 1

a)

	Oct-17	Nov-17	Dec-17	Jan-18	Feb-18	Mar-18	Apr-18	May-18
Sales	180,000	180,000	360,000	450,000	500,000	360,000	360,000	280,000
Opening balance			40,000	-	-	-	-	-
Cash sales	18,000	18,000	36,000	45,000	50,000	36,000	36,000	28,000
(Sales*10%)
Collection in the month following the sale		121,500	121,500	243,000	303,750	337,500	243,000	243,000
(Sales*90%)*75%
Collection in the second month following the sale			24,300	24,300	48,600	60,750	67,500	48,600
(Sales*90%)*15%
Cash available			221,800	312,300	402,350	434,250	346,500	319,600
Labour and raw materials costs			216,000	270,000	300,000	250,000	216,000	168,000
General and administrative expenses			27,000	27,000	27,000	27,000	27,000	27,000
Lease payments			9,000	9,000	9,000	9,000	9,000	9,000
Miscellaneous payments			2,700	2,700	2,700	2,700	2,700	2,700
Income tax payment						300,000
Deposit required			180,000
Interest payment				14,903.00	15,694.21	12,337.30	24,012.42	19,267.29
Cash payments			434,700	323,603	354,394	601,037	278,712	225,967
Deficiency of cash			212,900	11,303	-	166,787	-	-
Financing by
Bank o/d			212,900	11,303	-	166,787	-	-
Repayment
Bank o/d			-		(47,955.79)		(67,787.58)	(93,632.71)
Closing balance			-	-	-	-	-	-
O/S bank o/d			212,900	224,203	176,247	343,035	275,247	(93,633)

b) Advantages of Zero based budgeting

1)Better utilisation of resources as it is based on needs and benefits

2)This is a cost effective approach

3)This detects inflated budgets

4)Eliminates wastes and reduces costs

5) This approach identifies opportunities for outsourcing

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