QUESTION THREE

Grays Ltd are planning their cash needs for next year, starting on 1st January 2020 selling home and office furniture. The following details were made available for you:

• The following sales forecasts have been drawn up for the next three months.

• As Grays Ltd is planning to allow customers to pay a small deposit of 10% of the value of the order when they sign the contract. This will be followed by 40% one month later and the remaining 50% of the sales value is paid in month after that. The management of Grays Ltd are not expecting any bad debts in the first three months of trading.

• Monthly purchases of furniture are estimated to be equal to 70% of that month’s sales. Trade creditors are paid in full in the month following the purchase.

• The company intends to hire 4 employees. The average annual gross salary is £30,000 for each employee, payable on the last day of each month.

• The company’s management has decided to rent a premises that will require an initial deposit of £14,000 and an ongoing rent of £7,000 per month payable on the first day of each month.

• A marketing and advertising campaign will be launched in January at a cost of £9,000 with further monthly campaign costing £4,000 starting in February.

• Administration overhead is budgeted to be £3,000 per month, 40% to be paid in the month of usage and the balance one month later.

• The company will have £40,000 of cash in the bank on 1st January 2020.

Required:

a) Prepare the cash budget by month and in total for the three months period January to March of 2020.

b) If there are any cash shortfall in any month during the budget period, suggest ways in which it can be addressed by the company’s management.