New BusinessH Ltd

Questions: You have the following information about a H Ltd, a new business: Budgeted Credit sales Budgeted Cash sales January, 2014 40,000 30,000 February 45,000 20,000 March 50,000 25,000 April 55,000 30,000 Collections on credit sales average 40 percent in the month of sales and the remaining 60 percent in the month following the sales. Cost of sales (purchases) averages 60% of total sales revenue. Twenty percent of cost of sales is on cash basis, and 80 percent is paid in the month following purchases. Other operating expenses according to the forecasted income statement follow: January February March Wages and salaries $18,000 $18,000 $18,000 Office rent 6,000 6,000 6,000 Insurance 1,000 1,000 1,000 Utilities 2,000 2,000 2,000 Other operating costs 5,000 5,000 5,000 Depreciation 3,000 3,000 3,000 Interest expense 500 500 500 Note that the payroll, utilities, other operating costs, and interest expense are paid in cash each month as the expense is incurred. The insurance expense is paid in January each year in advance for the whole year ($12,000 per year). The office rent is paid quarterly in advance starting January each year. In March, the company plans to sell some old equipment and estimates it will received $10,000 from the sale. At the same time, it must spend $30,000 on new equipment. The beginning cash balance on June 1 is $10,000. Required: a) Prepare the businesss cash budget for each of the three months: January, February, and March. b) Give three recommendations on how you could improve the cash flow of H Ltd. Answers: a) The following is the cash budget: Particulars January February March Cash collections: Budgeted cash sales 30,000.00 20,000.00 25,000.00 Budgeted credit sales January 16,000.00 24,000.00 40,000.00 February 18,000.00 27,000.00 45,000.00 March 20,000.00 Sale of equipment 10,000.00 Total cash collections 46,000.00 62,000.00 82,000.00 Less: cash payments 57,900.00 66,900.00 65,700.00 Cash deficit -11,900.00 -4,900.00 16,300.00 Particulars January February March Cash payments: Cost of sales: 42,000.00 39,000.00 45,000.00 Cash 8,400.00 7,800.00 9,000.00 Credit 33,600.00 31,200.00 Other operating expenses: Wages and salaries 18,000.00 18,000.00 18,000.00 Office rent 12,000.00 Insurance 12,000.00 Utilities 2,000.00 2,000.00 2,000.00 Other operating costs 5,000.00 5,000.00 5,000.00 Interest expense 500.00 500.00 500.00 Purchase of new equipment 30,000.00 Total cash payments 57,900.00 66,900.00 65,700.00 b) The following are the ways in which the cash flows could be improved: Defer the purchase of the new equipment Try to reduce the operating costs Increase the % of the credit sales collections.