Question A CASH budget is required to enable the General Manager to decide what
ID: 2536916 • Letter: Q
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.
Explanation / Answer
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.
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