11 Cash budget. International Golf Ltd operates a large warehouse selling golf equipment direct to the public by mail order and to small retail outlets. The cash position of the company has caused some concern in recent months. At the beginning of December there was an overdraft at the bank of £56,000. The following data concerning income and expenses has been collected in respect of the forthcoming six months:

December £000 January £000 February £000 March £000 April £000 May £000 Expected sales 120 150 170 220 250 280 Purchases 156 180 195 160 150 160 Advertising 15 18 20 25 30 30 Rent 40 40 Rates 30 Wages 16 16 18 18 20 20 Sundry expenses 20 24 24 26 26 26 The company also intends to purchase and pay for new motor vans in February at a cost of £24,000 and to pay taxation due on 1 March of £30,000.
Sales to the public are on a cash basis and sales to retailers are on two months’
credit. Approximately 40 per cent of sales are made to the public. Debtors at the beginning of December are £110,000, 70 per cent of which are in respect of November sales.
Purchases are on one month’s credit and, at the beginning of December, the trade creditors were £140,000. The purchases made in December, January and February are considered necessary to stock up for the sales demand from March onwards.
All other expenses are paid in the month in which they are incurred. Sundry expenses include a charge of £8,000 per month in respect of depreciation.
Required:

(a) Explain the benefits to a company of preparing a cash flow forecast.

(b) Identify and discuss the costs to a company associated with:
(i) holding too much cash; and (ii) holding too little cash.

(c) Prepare a cash flow forecast for International Golf Ltd for the six months to 31 May which shows the cash balance at the end of each month.

(d) State what problems International Golf Ltd is likely to face during the next six months and how these might be dealt with.