Calm Ltd is preparing to set up business on 01/07/2016 and has made the following forecast for the first six months of trading: July 420,000 444,000 580,000 Purchases 180,000 220,000 260,000 August September October November December 590,000 620,000 265,000 340,000 Sales 625,000 370,000 1. The expected selling price is K50 per unit. 2. The cash collection pattern from Debtors is expected to be; Cash Customers 20% of sales revenue will be for immediate cash and cash discount of 5% will be allowed. Credit Customers 80% of sales revenue will be from credit customers. These debtors will pay their bills 50% in the month after sale and the remainder in the second month after sale. 3. The cash payments pattern for purchases is expected to be; Credit Suppliers The purchases will be paid for 50% in the month after purchase when a 2% cash discount will be received. The remaining purchases will be paid for in the second month after purchase. 4. Expenses of the business will be settled as follows: Expected Costs Wages K60, 000 per month payable as incurred. Variable overheads K10 per unit payable as incurred. Fixed overheads (including depreciation) K65, 000 per month payable as incurred. Capital Costs Equipment will be purchased on 1 July costing K42, 000 which will have a useful life of 5 years. To finance this purchase a loan of K36, 000 will be secured at 6% per annum. The capital sum is to be repaid in 36 monthly instalments commencing on I August. The interest for each month is to be paid on the last day of that month based on the amount of the loan outstanding at that date. | Required: a. Prepare a cash budget for six months July to December 2016. (15 Marks) b. On the basis of the cash budget you have prepared what advice would you give the management of Calm Ltd? (5 Marks)