A group of friends have formed a new business called Fashion Clothing, an online and mail order clothing business, in which they have invested 200,000 of their own capital. They intend to manufacture and sell quality clothes. They have set the business up and are selling direct to the final consumer, using a combination of aggressive marketing across a range of different media and also with the use of an automated web site that accepts online orders. To support this, they also have a department of telephone sales and support staff ready to help customers. The sales staff work in teams and receive a basic salary plus commission for each successful sale. By the start of July 20X5, they have spent 150,000 on tangible non-current assets, and they currently have the remaining 50,000 in their business bank account.

They provide you with the following forecasted figures for their first 6 months of trading:

Sales for the next 6 months

1,175,000

Cost of the materials used up in sales

460,000

Labour costs for the 6 months

480,000

Other expenses for the 6 months, including marketing costs and 15,000 depreciation of tangible non-current assets

Their projected cash receipts and payments are estimated to be as follows:

Month (20X5)

Sales receipts

Payments for materials

Labour and other expenses

July

150,000

120,000

These payments are divided equally over this six month period

August

120,000

100,000

September

150,000

60,000

October

210,000

60,000

November

260,000

60,000

December

285,000

60,000

In addition to the above, they expect to have to pay a tax bill of 20,000 in December 20X5. All transactions will go through their business bank account.

Required:

(a) Prepare an opening statement of financial position at the start of July 20X5.

(b) Prepare a monthly cash flow forecast, showing the bank balance at the end of each of the 6 months and indicating what level of overdraft facilities the friends need to negotiate with their bank manager.

(c) Explain what additional expense they should take into account as a result of needing the financial assistance (overdraft) referred to in (b).