7 Cash budget. Jennifer’s Rock Solid Music Centre sells a wide range of music and entertainment media. Jennifer is concerned about her cash management and has asked for your help in preparing a cash budget for the next six months, July to December. She has supplied you with the following information.

Sales are forecast at £36,000 per month for July, August and September, £42,000 for October, £55,000 for November, £70,000 for December and £24,000 for the following January. Eighty per cent of sales are for cash and the remaining 20 per cent are sold on one month’s credit. Actual sales for June were £32,000.

Purchases are equal to 60 per cent of sales and are bought in one month prior to sale.

Ten per cent of purchases are for cash, 50 per cent are paid for in the month following delivery and the remaining 40 per cent are paid for one month later.

Grant aid of £3,000 is due to be received in July.

Wages are estimated at 10 per cent of total monthly sales and are paid in the month to which they relate.

Rents, rates, insurance and other overheads (including depreciation of £500) are estimated at £7,500 per month.

Advertising and promotion expenses are budgeted at 5 per cent of total monthly sales and are paid in the following month.

Jennifer has personal drawings in cash of £2,000 per month.

Taxes of £3,000 and £4,000 are due to be paid in July and October, respectively.

Jennifer expects her cash balance to be £3,000 overdrawn on the first of July. Her bank manager has agreed an overdraft of £8,000 which is due for review in December.
Required:

(a) Prepare and interpret a cash budget for Jennifer’s Rock Solid Music Centre for the six-month period July to December.

(b) How might sensitivity analysis be applied as a means of evaluating risk in this case?