Jill has recently been made redundant from her job as a designer. She has decided to use her redundancy money to realize her dream of starting a business which manufactures and sells high quality greenhouses. In order to start the business Jill has applied for a business start up loan from the bank. The bank requires a business plan, which includes a cash flow forecast. Jill has prepared the cash budget for the first six months of the business.
Table 7.4
|
June |
July |
Aug |
Sept |
Oct |
Nov |
|||||||
|
Receipts |
$ |
$ |
$ |
$ |
$ |
$ |
||||||
|
Sales |
0 |
0 |
40,000 |
60,000 |
60,000 |
80,000 |
||||||
|
Payments |
||||||||||||
|
Materials |
0 |
30,000 |
20,000 |
20,000 |
35,000 |
50,000 |
||||||
|
Wages |
3,500 |
3,500 |
3,500 |
4,200 |
4,200 |
4,200 |
||||||
|
Drawings |
1,750 |
1,750 |
1,750 |
1,750 |
1,750 |
1,750 |
||||||
|
Workshop |
900 |
900 |
900 |
900 |
900 |
900 |
||||||
|
Advertising |
8,000 |
1,000 |
1,000 |
|||||||||
|
General |
400 |
400 |
400 |
400 |
400 |
400 |
||||||
|
Van |
12,000 |
|||||||||||
|
Land Rover |
450 |
450 |
450 |
450 |
450 |
450 |
||||||
|
Equipment |
12,000 |
25,000 |
||||||||||
|
Loan |
1,200 |
1,200 |
1,200 |
1,200 |
1,200 |
|||||||
|
39,000 |
39,200 |
54,200 |
28,900 |
43,900 |
58,900 |
|||||||
|
Increase/(Decrease) |
(39,000) |
(39,200) |
(14,200) |
31,100 |
16,100 |
21,100 |
||||||
|
Opening Balance |
55,000 |
16,000 |
(23,200) |
(37,400) |
(6,300) |
9,800 |
||||||
|
Closing Balance |
16,000 |
(23,200) |
(37,400) |
(6,300) |
9,800 |
30,900 |
In relation to the cash budget, Jill has provided you with the following information:
- The business will commence on 1 June with $55,000 in the bank. $30,000 of this will come from Jill’s redundancy money. The remaining $25,000 will come from a business start up loan.
- Jill will rent a workshop unit on an industrial estate. This will cost $900 per month, payable at the start of each month.
- A van will be bought in June at a cost of $12,000.
- General workshop costs (light, heat, power etc) and the van’s running costs are expected to be $400 per month.
- Jill will also lease a Land Rover Discovery car starting in June. The monthly lease payments will be $450, payable on the 10th of each month.
- The greenhouses will be sold to local garden centres. Sales are expected to be as follows:
|
June |
July |
Aug |
Sept |
Oct |
Nov |
|
|
Number of greenHouse |
10 |
15 |
15 |
20 |
25 |
30 |
The sales price of each greenhouse will be $4,000. In order to stimulate interest from customers, Jill has offered two months’ credit.
7. Purchases of materials, which will be on one month’s credit, are expected to be as follows:
|
June |
July |
Aug |
Sept |
Oct |
Nov |
|
$30,000 |
$20,000 |
$20,000 |
$35,000 |
$50,000 |
$60,000 |
8. Jill will initially employ a workshop manager at a cost of $1,500 per month and two further staff at a cost of $1,000 per month each, payable on the last day of the month. When sales reach 20 greenhouses per month, she will employ an additional person at a cost of $700 per month. Jill will herself draw $1,750 cash each month from the business.
9. Jill wishes to undertake a substantial advertising campaign to launch the business. This will cost $8,000 in the first month and $1,000 per month for a further two months, payable in the month incurred.
10. The machinery and equipment needed will be bought immediately at the start of June. Most can be bought second hand for $12,000 cash. Other machinery, costing $25,000, will be bought new on two months’ interest free credit.
11. Repayments on the business loan, including the interest element, will be $1,200 per month. These will be payable on the 15th of the month, commencing in July.
Required:
Analyse Jill’s cash budget and make any recommendations which you feel would improve her cash management.