Question

Busiswa Agri Business, has sales of R400 000 in March and R480 000 in April. Forecasted sales for May, June and July are R560 000, R640 000 and R800 000 respectively. The firm has an opening cash balance of R40 000 on 1 May and wishes to maintain a minimum cash balance of R40 000 during each month.

The following additional information also applies to Busiswa Agri Business
• 25% of sales is collected in the month of sale, 50% is collected in the next month, and the remainder is collected in the second month following the sale
• The firm receives other income in cash of R16 000 per month
• The firm's actual purchases, all made for cash, are R440 000, R560 000 and R320 000 for the months of May to July respectively
• Rent is R24 000 per month and is payable in cash
• Salaries account for 10% of the previous month's sales and are payable in cash
• A cash dividend of R96 000 will be paid in June
• A cash purchase of equipment costing R48 000 is scheduled in July
• An amount for depreciation on vehicles amounting to R8 000 should be accounted for in July.
• Taxes of R48 000 are due in June

REQUIRED
Prepare a cash budget for the months of May, June and July for Busiswa Agri Business and state whether this firm has excess financing or whether it may need to borrow funds during this period

Answer 1

The cash budget can be made in the following way, the explanation is given bellow it:

- The sales, both past and predicted are given in the first line as per the question.

- 25% of sales is collected in the month of sale, 50% is collected in the next month, and the remainder is collected in the second month following the sale. Using this the sales amounts are divided into the 1st , 2nd and 3rd month lines.

For example: Sales in March - 400,000. Cash received in March = 0.25*400,000 = 100,000. Cash recieved in April = 0.5*400,000 = 200,000. Cash recieved in May = 0.25*400,000 = 100,000

- Other income is given to be 16000 every month

- Actaul purchase amounts are given in the question.

- Rent per month is given in the question.

- Salaries are said to be 10% of the previous month's sales.

For example: Salaries paid in May = 0.1*480,000 = 48,000

- Cash dividend paid in June as per the question

- Equipment purchased in July as per the question

- Depriciation accounted for in July

- Taxes paid in June as per the question.

- Opening cash of May is given as 40,000. For the other months, the opening cash is the amount left over the last month if it is above 40,000 or it is 40,000 with money being borrowed from the bank.

- Closing cash = (0.25 * Cash received for sales of current month + 0.5* Cash received for sales of previous month + 0.25* Cash received for sales the month before last + Other income + Opening cash) - (Actual purchase + Rent + Salaries + cash dividend + Equipment bought + Depriciation + Taxes )

- It is required that a minimum balance of 40,000 be maintained. If the profits fall short, the remaining money is borrowed.

As we can see, to maintain the minimum balance required by the company, borrowing has been necessary in the months of May and June.