Bad cash flow over the next quarter to 30 November. Although the company had good relations with its bankers, it was concerned that the company’s recent operational losses plus its planned capital expenditure in October would strain the company’s overdraft limit.

The company plans to purchase a new digital lathe in September, costing $200,000. The payment terms on the order are that 25% will be payable on delivery in October with the remaining 75% payable in November.

The following information is available to assist the preparation of the cash budget for the three months to 30 November 2020:

1. The opening cash balance is $93,400 at 1 September 2020.

2. The production manager expects direct labour costs to run at $22,000 per month, rising to $25,000 in November due to the overtime necessary to install the new equipment.

3. Monthly overheads (excluding salaries, but including $4,000 of depreciation) are expected to be $17,000.

4. Trade debtors at 1 September 2020 are $225,000 with the following age profile:

From June sales $10,000

From July sales $100,000

From August sales $115,000

Customers settle their debts in line with the following pattern – 20% in the month

after invoicing, 70% in the second month after invoicing and 10% in the third month

after invoicing. All sales are credit sales.

5. The company is due to pay $35,000 of corporate tax in September.

6. Trade creditors at 1 September 2020 are $117,000 with the following age profile:

From July purchases $52,000

From August purchases $57,000

The company has a policy of paying it suppliers within 60 days.

7. Projected sales for the next quarter are:

September $220,000

October $145,000

November $165,000

8. Projected purchases for the next quarter are:

September $80,000

October $60,000

November $55,000

9. Monthly salaries for sales and marketing staff are $8,500 with quarterly commissions earned by the sales staff in September and payable in September of $12,000.

10. Monthly salaries for general and administration staff are $7,800.

11. The company’s current overdraft limit is $42,000.

Question!!!

1. Prepare the profit and loss account forecast for the quarter to 30 November 2020.

Show all workings.

2. Prepare the cash budget for the quarter to 30 November 2020. Show all workings.

3. In view of the funding requirements highlighted by the cash budget, outline the actions that the chief financial officer can take to ensure that the company does not breach its overdraft limit.