Question # 3

The CEO of Gulf Limited wishes to prepare a cash flow budget to estimate the companys cash surplus or deficit. Gulf Statement of Financial position is as follows.

Statement of Financial Position of Gulf Limited as at 31 January 20X8

	'000	'000
Non-current assets at cost
Premises		3200
Less: accumulated depreciation on Premises	600	2600
Furniture	400
Less: accumulated depreciation on Furniture	100	300
2900
Current assets
Cash	0
Receivables	60
Closing Inventory	70
Prepaid expenses	20	150
TOTAL ASSETS	3050
Current liabilities:
Payables	600
Short term loan	350
Outstanding Expenses	550
Bank overdraft	250	1750
Non-current liabilities
Debentures	400	400
Equity
Ordinary share capital	650
Share Premium	250	900
TOTAL EQUITY & LIABILITIES	3050

Additional Notes:

The directors of the company have prepared the following estimates for the next 6 months: -

1. Sales and purchases are expected to be as follows:

	Sales '000	Purchases '000
February	25	15
March	28	18
April	32	22
May	38	26
June	40	32
July	46	38

(b) All sales are on credit. 50% of debtors pay one month after the month of sale. 25% of debtors pay two months after the month of sale. 25% of the debtors pay three months after the sale. Sales in January 20X8 were 6000. Sales in December 20X7 were 8000.

(c) All purchases are on one months trade credit.

(d) The Short-term loan is due for payment in March 20X8.

(e) The Outstanding expenses are due for payment in April 20X8.

(f) Administration and finance expenses (including depreciation of Premises) are expected to be 12000 per month in February and 24000 per month in subsequent months.

(g) Selling and distribution expenses (including depreciation of Furniture) are expected to be 32000 per month in February and 38000 per month in subsequent months.

(h) Depreciation of Premises is at the rate of 10% of cost per annum.

(i) Depreciation of Furniture is at the rate of 15% of cost per annum.

Required: Prepare a cash budget for Gulf Limited for the six months ended 31 July 20X8 which shows the cash balance at the end of each month and Critically discuss the cash flow problems will the company face over the next six months and how might the company deal with them?