Question 2

Barbara is considering opening up a business in dress designing and manufacture. She is contemplating applying for a loan of 15,000 which would bear interest at 10%. The interest is payable at the end of each year and the repayment of the loan will be in 3 years. Rent of a suitable space will be 500 per month which is payable in advance on the first day of each month.

Barbara has estimated her sales and purchases per month as follows:

Sales (gross)

Purchases (gross)

January

1,000

800

February

2,000

1,500

March

2,000

1,500

April

3,000

2,000

May

3,000

2,000

June

5,000

3,000

Sales will be on credit terms and Barbara will allow one month's credit. However, she will offer a 2% discount for a cash settlement within a month. She feels that 50% of her customers will pay in cash and hence take the discount.

Suppliers offer two month's credit but with a 5% discount for settlement within one month and 10% for cash. Barbara feels that she will be unable to take advantage of the 10% cash discount in the first year of trading but would anticipate to settle 50% of her purchases within one month and the balance in two months.

Wages will be 300 per month for a part -time worker. Electricity is and other charges are estimated at 7,000 per annum. This will be payable quarterly.

Barbara will require a delivery van to distribute her clothes to local retailers. She has been offered a van from her uncle for 5,000but her uncle will not require payment until next year. The running costs of the van are estimated to 100 per month.

Required:

(a)Draft a monthly cash budget for the first six months of trading.

(20 marks)

(b)Comment on the importance of cash budgets when starting up a business. (5 Marks)

(Total marks 25)