Cash flow forecasts - case study - cash flow management

Wholesale Phones Ltd

Three shareholders, Sandra, Sumira and Benson, have just set up a small company that buys mobile phones from Asia and the sells them to wholesalers in Europe. Marketing and selling is done using the Internet. When they started operations, Benson the Accountant, arranged an overdraft line with the Bank for $25,000. They had also recently deposited $20,000 in cash in return for the initial share issue (equity).

The early weeks were very hard, but the market was growing. Sales were very good, and all the owners' efforts were put into buying and selling. Credit was ignored, and Benson let the work on the cash flow forecast slip. The owners are in the boardroom when the receptionist interrupts them.

'Benson, phone the Bank Manager at once. Unless you talk to her, she will call our overdraft in.'

'What is she on about', said Sandra, 'does that mean I will have to cancel the order for my BMW?'

Benson went to his office. He had not really checked the cash position for two months.

He was a little worried. His records showed the following.

Opening bank balance - $2,500 credit

Overhead expenses

Rent: Office $5,000 per month. Two months paid. Furniture: $1,000 per month. One month paid. Cars: $2,500 per month. One month paid. Insurance: $2,000 per month. Two months paid. Tax: $500 per month. None paid. Services: $250 per month. Two months paid. Salaries and benefits: $12,000 per month. Two months paid. Misc.: $1,000 per month. One month paid.

Sales Purchases

Period 1: $15,000 All paid for. Period 1: $10,000 Paid. Period 2: $24,000 All paid for. Period 2: $18,000 Paid. Period 3: $40,000 Half paid for. Period 3: $25,000 Paid.

Was he right to be worried, and will Sandra get her car? He had set up an overdraft limit of $25,000 with the bank. How big a line might be needed?