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:
It is normal for there to be sales growth as the summer months approach and then for it to tail off as autumn approaches. Marshall's Swords Ltd 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%. Marshall's Swords Ltd 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 instalments: SR75,000 in April; SR50,000 in June.
Marshall's Swords Ltd 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 Marshall's Swords Ltd. 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.
A) Explain to Finance Director the key implications (figures) of the budgets produced (See attached Excel File) 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.