Goya Music Direct Ltd operates a mail order business offering classical music CDs to the general public. Its most recent statement of financial position is as follows:

Statement of financial position (balance sheet) as at 31 May 2008

£ £

Non-current assets Fixtures and fittings 72,000 Accumulated depreciation (24,000) 48,000 Motor vehicles 46,000 Accumulated depreciation (28,000) 18,000 66,000 Current assets Inventory 80,000 Trade receivables 107,000 Cash at bank 27,000 214,000 Total assets 280,000 Equity

£1 ordinary shares 10,000 General reserve 60,000 Retained earnings 40,000 110,000 Non-current liabilities Borrowings – 10% loan notes 2010/11 60,000 Current liabilities Trade payables 93,000 Accrued overheads 17,000 110,000 Total equity and liabilities 280,000 The following forecast information for the six months ended 30 November 2008 is available:

1 Sales revenue and purchases for the six months ended 30 November 2008 are estimated as follows:

Sales revenue Purchases

£ £

June 130,000 102,000 July 140,000 118,000 August 150,000 115,000 September 110,000 88,000 October 90,000 67,000 November 105,000 110,000 2 The gross profit margin on goods sold is 40 per cent.

3 Customers are allowed one month’s credit.

4 Salaries and wages are expected to be £30,000 each month. In addition, an annual staff bonus of £12,000 is due for payment in October 2008. All salaries and wages are paid in the month incurred.

5 Selling and administration expenses are expected to be £20,000 per month, which is payable one month in arrears. This figure includes a monthly charge of £3,000 per month in respect of depreciation of non-current assets. In addition to these expenses, the business is committed to a large advertising campaign. This is not due to commence until December 2008 although advance payments of £60,000 must be made to newspapers and magazines in November 2008.
6 The only finance expense incurred by the business is loan note interest which is not payable until the year end.
7 £10,000 of the loan note will be repaid in August 2008.
The business has agreed with the bank an overdraft limit of £100,000 to cover the next 12 months, which both parties are anxious should not be exceeded.
Ignore taxation.
Required:

(a) Prepare a projected cash flow statement for each of the six months to 30 November 2008.

(b) Prepare a projected income statement for the six months to 30 November 2008. (A monthly breakdown is not required.)

(c) Discuss the problems, if any, the business is likely to face in the next six months and how these might be resolved.