QUESTION 5

A company needs to produce a cash budget in order to ensure that there is enough cash within the business to achieve the operational levels set by the functional budgets.

Following a series of meetings by the budget committee, the following information has been collected relating to the first 3 months of activity:

Trading:

Sales are expected to be as follows:

June and July £50,000 a month

August £60,000.

90% of sales are for cash, the remainder of sales are on credit terms and collected 1 month later. 50% of Cash Sales are allowed a 5% NUS discount.

Stock purchases are estimated to be 40% of sales each month purchased as sales are made. Suppliers are paid one month in arrears.

Fixtures and Fittings (F&F) in June will cost £75,000 cash. The company will acquire two vehicles of £50,000 in June on cash. Both F&F and vehicles will be depreciated at 10% of cost per year on a straight-line basis.

One experienced staff member will be employed at a cost of £3,000 a month and each of three directors will initially take £1,500 per month in salary in June and 2,000 thereafter. Overheads are forecasted to be £3,500 per month and paid one month in arrears.

Please note that the monthly overheads include £500 impairment expense in regard to an expected extensive damage to the vehicles.

Rent is £36,000 per year, one half payable in June and another in July.

The Shop has been stocked at a cost of £62,000 and this is paid in June.

Financing

Each director will contribute £15,000 in Capital and a £120,000 loan has been arranged with repayments over 10 years through equal monthly repayments of £1,700, to cover capital and interest.

Required:

a) Prepare a monthly cash budget for the three months June to August.

b) Comment on the cash position from June to August, including any recommended course of action regarding the cash balance over the period concerned

c) Discuss the differences between fixed and flexible budgets. The discussion should include the definition of each and the main points of differences.