Your friend, the owner of a service company, has asked to you to assist with certain aspects of a cash flow budget being prepared for an upcoming meeting. The company is preparing a Cash Flow Forecast for the period January 2020 to June 2020. The company is aware of how to deal with most aspects of the forecast, but wants your help in providing information as to what figures should go into it each month of the forecast relating to the following areas (a full cash flow statement is not required): 

(a) Cash received from sales

 Expected pattern of cash receipts from sales transactions: 30% received in month of sale. 45% received one month after sale. 25% received in the second month after sale. Customers are allowed to take a 3% discount on the 30% payment in the month of sale as a reward for paying promptly. Budgeted sales for the period are as follows: 

Month Oct' 2019 Nov ' 2019 Dec' 2019 Jan ' 2020 Feb ' 2020 Mar' 2020 Apr' 2020 May' 2020 June' 2020 € € € € € € € € € Sales 95,000 100,000 130,000 120,000 180,000 200,000 150,000 170,000 200,000 

(b) Purchase Payments

The company has a bad reputation for paying its suppliers (creditors). They currently pay their creditors in the third month after purchase. The manager has decided that this needs to change and has instructed the accounts department that in and from February 2020 they will pay their creditors on the following basis: 

 50% of purchase transactions will be paid in the month of purchase subject to a discount received of 2% on that month’s payment. 

 The remaining 50% of purchases are to be paid in the month following purchase. 

ACCT06038 – Management Accounting 2 Summer Assessment 2019/2020 Page 3 of 9 Forecast purchases for the period are as follows: Month Oct' 2019 Nov ' 2019 Dec' 2019 Jan ' 2020 Feb ' 2020 Mar' 2020 Apr' 2020 May' 2020 June' 2020 € € € € € € € € € Purchases 80,000 50,000 85,000 70,000 75,000 65,000 50,000 80,000 90,000 

(d) Wage Payments 

 60% of employees are paid on an hourly basis. The standard working week is 40 hours with each month consisting of four weeks. The labour rate per hour is €12. The remaining 40% of employees are paid on a piecework basis. The piecework rate is 10 cent (€0.10) per unit produced. All payments are paid one month in arrears (one month after costs are incurred). 

The total expected number of employees per month are as follows:

 Month Oct’ 2019 Nov’ 2019 Dec’ 2019 Jan’ 2020 Feb’ 2020 Mar’ 2020 Apr’ 2020 May 2020 June 2020 Total no of employees 20 25 30 25 20 30 20 20 25 The number of units produced, per employee, per month, are as follows (40% of total employees are paid on a piecework basis): Month Oct 2019 Nov 2019 Dec 2019 Jan 2020 Feb 2020 Mar 2020 Apr 2020 May 2020 June 2020 Units produced (Per employee) 10,000 15,000 20,000 15,000 20,000 16,000 16,000 16,000 16,000 

(d) Depreciation 

 The company purchased €100,000 in assets during 2018 which are depreciate at 25% per annum. Explain to the company how to deal with depreciation in regards to the cash flow forecast. 

e) Explain in detail why cash flow forecasts are an important tool to use in managing an organisation.