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Topic 11: Cash Budgeting – Activities

Using the information given, construct cash budgets for the following companies. Check your answers to the solutions provided on moodle.

Question 1:

Information to complete the cash budget for Company X Ltd:

1. The company will make their first sale in January and expect to sell their product for £60 per unit. They have forecast the following level of sales for each of months January to April:

 Month Quantity(units) January 10,000 February 12,000 March 14,000 April 14,000

It is expected that 40% of the sales will be paid in cash in the month of sale.  The remaining sales will be made on credit. Of the amount sold on credit, it is expected that half will be paid the following month with the balance two months after the sale.

Hint: calculate the sales revenue by multiplying the number of units sold by the sales price per unit. You can then calculate the amounts received on cash and credit. Think about which month each amount will be received in.

1. Products are required to be made one month in advance of the sales. For example, the January sales of 10,000 units will be manufactured in December.

To make the products the business will require labour and raw materials. Labour costs are forecast at £12 per unit and Material costs at £9 per unit.

Staff are paid at the end of the month in which they have produced the product. Material suppliers have agreed to two months’ credit from date of deliver. Note that materials will be delivered at the beginning of the month in which they will be used in production.

Hint: draw up a timeline of events. For example, the products sold in January will be made in December. When will they staff be paid? When will the materials be delivered and when will they be paid for? Once you have ascertained the timings, calculate the amounts by using the sales unit volumes from point 1 above.

1. Company X Ltd had a closing cash balance on 31 December of £10,000.

Question 2:

Freedom Ltd will begin trading on 1 June. The company will manufacture and sell smart speakers. The speakers will be sold to both direct customers via postal sales and to retail outlets at a selling price of £80.

After detailed market research and analysis the following data has been collected:

Month                       Forecast Sales (quantity of speakers)

June                               0

July                                3,000

August                           4,000

September                      5,000

October                          6,000

November                       6,500

### December                       7,000

1. The business has 4 shareholders who will each invest £30,000 on 1 June.

1. Freedom Ltd has negotiated a bank loan of £60,000 which the business will receive on 1 June 2019 and which they plan to repay in December of the same year. Interest will be charged and paid monthly at a rate of 10% per annum from July onwards.

1. 30% of the monthly sales will be paid in cash by the direct postal customers. The remaining sales are to the retail stores and will be payable one month later as credit terms were necessary to attract business.

1. The equipment necessary for the manufacturing will cost £300,000 and is to be installed on 1 June. Payment must be made within 2 weeks of installation.

1. Materials will cost £24 per unit, with the suppliers accepting payment two months after delivery. Materials will be delivered to Freedom Ltd on the first day of each month so that the speakers can be produced to meet the sales demand of the following month.

1. Each speaker takes 2.5 hours to manufacture at a labour cost of £8 per hour. The employees will be paid in the month in which they earn their wages.

1. An advertising campaign will launch the product in June at a cost of £10,000 which will be paid in that same month.

1. The business has forecast its overheads to be £12,000 per month from June onwards. 20% of these costs must be paid in cash with the remainder being paid one month later.

Required:

1. Identify the maximum overdrawn position forecast during the first six months.
1. What sales are outstanding at the end of December?
1. Analyse the cash budget and suggest ways in which the overdrawn position could be improved.