Changes Ltd owns five 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 Year 10 the company had an overdraft of £70,000. In view of this, Changes Ltd’s chief executive has asked you to prepare a cash flow projection for the next six months. You have collected the following data:

Oct

£000 Nov

£000 Dec

£000 Jan

£000 Feb

£000 Mar

£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 Insurance 40 Other expenses 20 20 20 20 20 20 Refurbishing shops 80 Inventories 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 replenish inventories 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 insurance 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 Year 11.

(b) Compute the projected inventories levels at the end of each month for the six months to 31 March Year 11.

(c) Prepare a projected income statement for the six months ending 31 March Year 11.

(d) What problems might Changes Ltd face in the next six months and how would you attempt to overcome them?
( Hint: A forecast of inventories flows is required to answer part (b). This will be based on the same principles as a cash flow statement – that is, inflows and outflows with opening and closing balances.)