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SAMY Company makes and sells wooden swords for martial arts practice. The company is contemplating

investing in a new production line, in the next six months. The Company Accountant, who is currently off sick because of a golfing accident, has telephoned in to say that she is a little worried about the cash position of the company.


Knowing your expertise in working capital budgeting the Finance Director calls upon your services to set the Accountant's mind at ease.


The following information is readily available:


The sales budget for the period January to August is set out in the table below:


Feb 30000SR

Mar 50000SR

Apr80000SR

May 100000SR

Jun140000SR

Jul150000SR

Aug180000SR


SAMY company sells its swords through the internet and through wholesale outlets. 25% of sales are through the internet and are treated by the company as cash sales as the credit card companies pay the company promptly. 75% of the sales to wholesalers are paid in the month following sale, with the remaining 25% of sales to wholesalers being paid two months after sale.

It is company policy to manufacture goods in the month preceding sale. Cost of Raw Materials usage is 40% of the next month's sales value, and it is policy to maintain Closing Inventory of Raw Materials at 30% of the following month's usage.

Raw Materials are bought partly for cash - 65% - and on credit -35%. SAMY company wants to maintain good relationships with its suppliers to ensure steady and secure supply. It therefore pays its suppliers in the month following purchase.

Rent and Property Taxes of SR40,000 per year on the premises are payable quarterly commencing in April. Overheads of SR5,400 are incurred monthly. These overheads include depreciation of SR2,000 per month.


The proposed Capital Investment is to be paid for in two installments: SR75,000 in April; SR50,000 in June.


SAMY company has negotiated short term finance to cover any possible overdraft. It is company policy not to allow its cash balance to become overdrawn. In addition the second instalment of a long term loan will be received by SAMY Company. This amounts to SR25,400 and will be received in April.



The Balances as at start of business on 1 April were as follows:


Cash - SR8,290 in hand


Inventory of Raw Materials - SR8,750


Because of the holidays neither Trade Payables nor Trade Receivables had opening balances as they were both cleared before the holiday break.



Required:


 Explain to Finance Director the key implications (figures) of the budgets produced (See attached Picture Case-Study.xls-2020.jpg) and what action does the Finance Director needs to take (such as the amount and type of finance needed) to ensure that the Company's Cash Balance does not become overdrawn.


                                                                                                

Case-Study.xls-2020.jpg

Feb Mar Apr May Jun Jul Aug
Sales (f)
30000 50,000 80,000 100,000 140,000 150,000 180,000 MARSHALL'S
SWORDS
Cash Sales. %
35%
LTD
Usage %
35%%
CASH
Of Sales
BUDGET
Cash Purchases. %
60%
MARSHALLSWORDS
Inventory
25%
% Of
April
May
June
Jul
LTD - BUDGETS
Usage
Total
RAW MATERIALS
INVENTORY
BUDGET (Es)
RECEIPTS
March April May
June
July
Cash Sales
28,000
35,000
49,000
52.500
164,500
7,000 8,750 12,250 13,125 15,750
Trade
Receivable -
Opening Balance
Receipts
27,000
43,500
57,000
78,000
205,500
Loan
Purchases
29,750 38,500 49,875 55,125 47,250
Received
25,400
25,400
36,750 47,250 62,125 68,250 63,000
Total Receipts
80,400
78.500
106,000
130,500
395,400
Production - Usage
28,000 35,000 49,000 52,500 63,000
Closing Balance
8,750 12,250 13,125 15,750
PAYMENTS
Trade
Payables
Payments
1 1,900
15,400
19,950
22,050
69,300
Purch
On
40%
Cas
Credit
Purchases
23,100
29,925
33.075
28,350
114,450
TRADE PAYABLES
ent &
BUDGET
Property Tax
10,000
10,000
March April May
June July
Overheads
3,400
3,400
3,400
3,400
13,600
Opening Balance
11,900 15,400 19,950 22,050
Capital
Expenditure
75,000
50,000
125,000
Purchases
11,900 15,400 19,950 22,050 18,900
123,400
48,725
106,425
53,800
332,350
27,300 35,350 42,000 40,950
NET CASH
k/Cash Payments
11,900 15,400
19,950 22,050
FLOW
("#,##0")
29,775
"#,##0"
76,700
63,050
OPENING
Closing Balance
1,900 15,400 19,950 22,050 18,900
BALANCE
8,750
"#,##0")("#,##0") ("#,##0")| 8,750
CLOSING
BALANCE
("#,##0") ("#,##0") ("#,##0&quot
71,80
71,800
Sales.%
On
60%
Credit
TRADE
RECEIVABLES
BUDGET
Feb March April May
June
July
Opening Balance
34,500 55,500 72,000 99,000
Sales
18,000 30,000 48,000 60,000 84,000 90,000
82,500 115,500 156,000 189,000
1 Month After Sale
(75%)
13,500 22,500 36,000 45,000 63,000
2 Months After Sale
(25%)
4,500 7,500 12,000 15,000
Closing Balance
55,500 72,000 99,000 111,000
Feb Mar Apr May Jun Jul Aug
Sales (f)
15000 25000 40000 50000 70000 75000 90000
Feb Mar Apr May
Jun J
Aug
Sales ({)
30000 50,000 80,000 100,000 140,000 150,000 180,000
50%

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