Question 1 - 20 marks

A very good friend, Peter is starting a business in November 2021. You had a conversation

with him recently and the following is the excerpt of the conversation notes that you have

written down.

Conversation notes:

Peter was concerned about measuring the performance of the business and in particular the

planning required to ensure that the business is adequately funded, especially at the start of

the business as he reckons that the sales will be low in the beginning. He knew that I was

enrolled in a business degree programme and hence sought some financial advice from me.

I suggested to him to prepare a cash flow forecast at least for the first three months to ensure

sufficient liquidity. I advised him that he needed to make some estimates regarding estimated

sales and other variables such as the profit margin expected.

He subsequently did provide some information and after a few phone calls to him I managed

to put together the information in Appendix 1.

I advised Peter that I will also discuss and advise him about the cash flow situation and

thereafter discuss financing sources for the business also.

Peter was also curious about budgeting and had heard about the concept of " Beyond

Budgeting" from one of his friends. He asked me about its relevance especially in the current

pandemic situation.

Appendix 1 - Information provided

(a) Peter will contribute $10,000 on 1st November 2021.

(b) Sales are expected to be as follows:

$

November 2021

40,000

December 2021

50,000

January 2022

80,000

He estimates that 50% of the sales is for cash and credit customers will pay in the

month following sale.

(c) Peter did some research and found that most companies in the industry sell their

product at a gross profit margin of 50%. He is hoping his suppliers will offer the

company a one month credit term. He advised that he will purchase inventory in the

same month of sale.

(d) Peter will hire 3 employees and their salaries have been set at $10,000 per month,

payable at the end of the month. I included the employer's Central Provident Fund

(CPF) monthly contribution in this figure.

(e) Administrative overheads are set at $25,000 per month. The overheads are paid in

the month incurred. I computed annual monthly depreciation at $1,000 and included

it in the administrative overheads.

(f) Peter advised that a machine is to be purchased in December 2021 for $50,000 in

total. The seller has agreed that it can be paid in two equal monthly installments

starting in January 2022.

Required:

a) Prepare a Cash Budget for the business for each of the three months from November

2021 to January 2021 showing the ending cash balance at the end of each month. (15

marks)