Ricketts Company plans to start a new business. The estimated pattern of cash flows for the

first three months of 2019 is as follows:

i. 1 January 2019: deposit $2 000 000 into a business bank account.

ii. 1 January 2019: purchase of machinery for $35 000 and a delivery van

$600 000 - paying immediately by cheque.

iii. 5 January 2019: purchase of goods totaling $948 000, payments to be

made in equal instalments at the end of January, February and March

2019.

iv. Credit sales: January $450 000, February $650 000, and March $650

000. Customers are expected to settle their accounts by the end of the

month after sale.

v. Cash sales are expected to average $120 000 per month and these

customers are allowed a 5% discount.

vi. Salaries of $190 000 per month will be payable on the last day of each

month.

vii. Sundry expenses of $210 000 per month will be payable during the

month following.

viii. Estimated corporation tax of $25 000 is to be paid in February

2019.

Cash purchases are expected to be $200 000 per month.

Required:

a) Prepare Rickett's cash budget for the three months ending 31 March 2019.

b) Give Rickett's management two (2) pointers as to what action to take if a cash budget

reveals liquidity challenges.