Question

Drosophila (Pty) Ltd is currently forecasting its short-term financing needs and it requires your assistance in determining these needs and the possible costs of financing. The following information has been gathered and passed on to you.
The bookkeeper extracted an aging report from the system and determined that 40% of sales were paid for in the same month that the sales were made and the remainder was paid 1 month later (all sales were on credit).
The company has access to a R1 000 000 revolving credit facility (line of credit) at a cost of 12% interest per year, assuming 365 days per year. No administrative fees are applicable.
All purchases and other expenses are paid in cash.
Sales from March, April and May were as follows:

March	April	May
R500 000	R600 000	R400 000

Expected sales for June, July and August are as follows:

June	July	August
R300 000	R400 000	R800 000

Additionally, purchases amount to 50% of sales and other costs amount to R200 000 per month but exclude a depreciation expense of R5 000 per month.

REQUIRED:
Draw up a cash budget for this company for June, July and August and determine how much the requisite short-term financing by way of the revolving credit facility will cost (in rand terms) if utilised. Use the space below to make your preliminary calculations and present your cash budget in the space provided below where indicated

Answer 1

	May(in R)	June(in R)	July(in R)	August(in R)
	Actual	Estimated	Estimated	Estimated
Sales	400,000	300,000	400,000	800,000
Cash collection:
40% collection in same month	160,000	120,000	160,000	320,000
60% collection in following month		240,000	180,000	240,000
Total expected cash collection		360,000	340,000	560,000

Sales are expected to be collected 40% in the same month and 60% in the following month. So, total expected cash collection in each month is calculated as per table above. For example, May sales is R400,000. So, 40% of R400,000 = R160,000 will be collected in May and 60% of R400,000 = R240,000 will be collected in June.

Cash Budget	June(in R)	July(in R)	August(in R)
Expected cash inflows	360,000	340,000	560,000
Expected cash outflows:
Purchases	150,000	200,000	400,000
Other costs	200,000	200,000	200,000
Total expected cash outflows	350,000	400,000	600,000
Excess(shortage) of cash	10,000	-60,000	-40,000
Credit facility required	0	60,000	40,000
Interest on credit facility @12% per year		611.51	407.67

Working notes:

Purchases are 50% of sales of each month and are paid in the same month. So, purchases expenses for June = 50% * R300,000 = R150,000, for July = 50% * R400,000 = R200,000 and for August = 50% * R800,000 = R400,000.

Other costs R200,000 per month are paid in same month in cash. Depreciation expense is not included since depreciation is not paid in cash.

Excess(shortfall) is calculated as expected cash inflows less expected cash outflows.

There is a shortage in July and August. So, there will be a need to access credit facility in these months for the respective shortage amounts.

Interest is charged by the Bank @12% per year considering 365 days in a year. July and August being 31 days each, interest is calculated as R60,000 *12% *31/365 for July, and R40,000 * 12% * 31/365 for August.