Question

Question

A CASH budget is required to enable the General Manager to decide what internal finances are available towards the purchase of a new machine, and when to pay dividends. He also needs to determine whether bank accommodation (overdraft) is required around Christmas to meet the needs of January holiday salaries paid in advance in December.

Further it is necessary to check the effect of lack of production in January on the expected cash flow for the following March and April.

The current profit and loss projection is as follows:

Sales (as detailed below)                                            $7,200,000

Expenditure

Materials                                  $2,215,000

Wages                                      $2,673,000

Factory O/H                            $1,380,000 (incl. depreciation $30,000)

Administration                         $ 430,000

-----------

$6,698,000

-----------

$502,000

Budgeted sales in successive months in thousands of dollars are:

July 2018              640                          January 2019       160

August                  530                          February              600

September             520                          March                  700

October                 600                          April                    750

November             650                          May                     650

December              650                          June                     750

NOTES:

Terms of Trade

Sales are received in cash two months after the month in which they are invoiced. Materials are paid two months after delivery of the goods.

Wages                            - prompt pay (i.e. treat as though paid in moth in which obligation incurred)

Factory overheads          - one month in arrears Administration                - one month in arrears

Expected sales prior to the beginning of the budget year are:

1 month before the beginning of the year (June 2018)            $550,000 2 months before the beginning of the year (May 2018)                           $580,000

Expected materials and direct purchases prior to the beginning of the year are: 1 month before the beginning of the year (June 2018)                          $112,000 2 months before the beginning of the year (May 2018)                           $122,000

Other expenses prior to the beginning of the year may be taken as the projected monthly average of the first three months of the year.

Capital Movements

Capital expenditure, initial overdraft and loan movements are as follows: Opening overdraft                           $40,000

Loans to the company total $84,000 and repayments are received at the rate of $4,000 per month for each month of the year.

Past expenses due in July 2018 consist for group tax of $60,000 Removal costs of $30,000 are to be budgeted for September

New machinery is planned, represented by a deposit of $40,000 in October with additional interest and capital payments of $10,000 per month starting in the following month and continuing (i.e. it is being bought through hire purchase). Development and R&D costs additional to the operating budget totalling $90,000 should be spread over the months of March, April and May.

January wages are paid in December.

Allow for a contingent legal action and liability over a product complaint of $5,000 in April.

Draw up a cash budget for the forward financial year and determine the net overdraft requirement for the budget period if no further share or loan assistance is obtained. Show on the same table or graph the effect on overdraft requirements if sales turn out to be 10% below the budget estimate due to pressure on prices and total monthly operating expenses are 5% below the budget estimate. New equipment expenditure is unchanged.

A suggested format for the items of the cash budget to be filled in for each month of the financial year starting from 1st July 2018 is as follows:

Beginning of month overdraft Income from sales

Loans shares into company Subtotal – inwards cash

Materials Wages

Hire purchase payments Factory overheads Administration

Other cash outgoings, including capital expenditure Subtotal – net outgoings

End of month overdraft

*             Do not forget to add back depreciation as it contributes to cash flow.

Answer 1

Sl. No.	Particulars	July 2018	August 2018	Sept 2018	Oct 2018	Nov 2018	Dec 2018	Jan 2019	Feb 2019	Mar 2019	Apr 2019	May 2019	June 2019
1.	Opening balance	(40000)	45417	200834	83668	6502	(40664)	(230580)	75004	157838	(279328)	(281494)	(178660)
2.	Receipts from sales	580000	640000	530000	520000	520000	600000	650000	650000	160000	600000	700000	7500000
3.	Depreciation	2500	2500	2500	2500	2500	2500	2500	2500	2500	2500	2500	2500
4.	Total receipts(A)	542500	687917	733334	606168	529002	561836	421920	727504	320338	323172	421006	573840
5.	Materials	122000	112000	184583	184583	184583	184583	184583	184583	184583	184583	184583	184583
6.	Wages	222750	222750	222750	222750	222750	445500	0	222750	222750	222750	222750	222750
7.	Factory OH	112500	112500	112500	112500	112500	112500	112500	112500	112500	112500	112500	112500
8.	Administration	35833	35833	35833	35833	35833	35833	35833	35833	35833	35833	35833	35833
9.	Past Expenses	0	0	90000	0	0	0	0	0	0	0	0	0
10.	New Machinery	0	0	0	40000	10000	10000	10000	10000	10000	10000	10000	10000
11.	Contingent legal action	0	0	0	0	0	0	0	0	0	5000	0	0
12.	Repayment of Loan	4000	4000	4000	4000	4000	4000	4000	4000	4000	4000	4000	4000
13.	R&D Cost	0	0	0	0	0	0	0	0	30000	30000	30000	0
14.	Total Payments(B)	497083	487083	649666	599666	569666	792416	346916	569666	599666	604666	599666	569666
15.	Net Closing Balance (A-B)	45417	200834	83668	6502	(40664)	(230580)	75004	157838	(279328)	(281494)	(178660)	4174

Cash Budget for the period July, 2018 to June, 2019 is presented below:

Total Overdraft Required is $ 1010726 throughout the year.