The managing director of Pumpkin Ltd was reviewing the results of the company for the financial year ended 31 March 2017. The following summarised information was available:

The managing director was pleased that the company had made a good profit, but he was rather concerned that a healthy bank balance at the beginning of the year had now become a large bank overdraft.
Consequently he asked the company accountant to prepare forecast information for 2017/18 in order that the cash situation could be improved.
The following information was prepared by the accountant:

2 All goods purchased are from a single supplier. The goods are purchased on credit and each month's purchases are paid for three months after the month of purchase.
The following purchase schedule had been prepared for the first 9 months of 2017:

3 Dividends would be paid as follows:
(i) Final ordinary dividend of 5p per share payable on 31 May 2017 in respect of financial year 2016/17.
(ii) Interim ordinary dividend of 2p per share payable on 31 July 2017 in respect of financial year 2017/18.
4 Selling and distribution expenses are expected to be 6% of a given month's total sales. They are paid one month in arrears.

5 Administration charges would be incurred as follows:

Administration charges are settled two months after the month in which they were incurred.
6 The company had decided to make a bonus issue of shares of one share for every three held. The issue would be made on 30 April 2017. The bonus shares would not qualify for the final dividend of 2016/17, but would qualify for the interim dividend to be paid on 31 July 2017.

Required:
(a) Comment on the liquidity of the company as at 31 March 2017 and explain to the managing director why a company can apparently make a good profit but have no cash in the bank.
(b) Prepare a cash budget for each of the four months ending 31 July 2017.
(c) Comment on the forecast bank balance as shown by your cash budget. Identify ways in which the bank overdraft could be reduced over the last five months of 2017.

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Balances as at 1 April 2016 Issued ordinary share capital: £1 fully paid shares Share premium account Balance of retained earnings Balances as at 31 March 2017 Net profit for year 2016/17 Non-current assets Bank overdraft Other net current assets 4 150,000 100,000 40,000 70,000 300,000 150,000 210,000