Changes Ltd owns a chain of eight shops selling fashion goods. In the past the business maintained a healthy cash balance. However, this has fallen in recent months and at the end of September 2008 the company had an overdraft of £70,000. In view of this, Changes Ltd’s managing director has asked you to prepare a cash flow projection for the next six months. You have collected the following data:

Oct Nov Dec Jan Feb Mar

£000 £000 £000 £000 £000 £000 Sales forecast 140 180 260 60 100 120 Purchases 160 180 140 50 50 50 Wages and salaries 30 30 40 30 30 32 Rent 60 Rates 40 Other expenses 20 20 20 20 20 20 Refurbishing shops 80 Inventory at 1 October amounted to £170,000 and payables were £70,000. The purchases in October, November and December are contractually committed, and those in January, February and March are the minimum necessary to restock with spring fashions. Cost of sales is 50 per cent of sales and suppliers allow one month’s credit on purchases. Tax of £90,000 is due on 1 January. The rates payment is a charge for a whole year and other expenses include depreciation of £10,000 per month.

Required:

(a) Compute the projected cash balance at the end of each month, for the six months to 31 March 2009.

(b) Compute the projected inventory levels at the end of each month for the six months to 31 March 2009.

(c) Prepare a projected income statement for the six months ended 31 March 2009.

(d) What problems might Changes Ltd face in the next six months and how would you attempt to overcome them?