BUSF_A01.qxd

Cash (including overdrafts and short-term deposits)

A business has the following plans for the next few months:

1 Sales revenue:

£

September 60,000

October 60,000

November 70,000

December 90,000

All sales will be made on credit. Half of the trade receivables are expected to pay within

the month of sale and to claim a 2 per cent cash discount. The remainder are expected

to pay in the following month.

2 Raw materials purchases:

£

September 20,000

October 40,000

November 40,000

December 30,000

The business plans to pay its trade payables (in full) in the month following that of the pur-

chase.

3 Wages and salaries:

£

September 12,000

October 15,000

November 17,000

December 13,000

All employees are paid in full in the month in which the wage or salary is earned.

4 Rent of £10,000 each quarter is payable in March, June, September and December.

5 Other cash overheads of £2,000 per month are payable.

6 Some new plant due for delivery in September will be paid for in November at a cost of

£25,000.

7 On 1 October the business plans to have £10,000 in the bank.

A cash budget for the months of October to December (inclusive) is to be prepared.

Example 13.4

Plan cash flows

Forward planning is vital in this area; failure to balance cash inflows with cash

outflows can be fatal.

The formal statement of financial plans (the budget) can probably best be explained

through an example.