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cash budget, Corporate Finance

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You have been asked to prepare a cash budget for Whitborrow plc for the next three months, October, November and December. The Managers are concerned that they may not have sufficient cash to pay for a £150,000 investment in equipment in December. The overdraft has reached its limit £70,000 at the present time - the end of September. Sales during September were a total of £400,000 of which £55,000 was received in cash. £165,000 is expected to be paid on October, with the remainder likely to flow in during November. Sales for the next three months are as follows:

Total sales Cash sales Credit sales

October 450,000 90,000 360,000

November 550,000 110,000 440,000

December 700,000 140,000 560,000

There is a gross profit margin of 40 percent on sales. All cost (materials, labour and other) are paid for on receipt. Only 20 percent of customer sales are expected to be paid for in the month f delivery. A further 70 percent will be paid after one month and the remainder after two months. Labour and other costs amount to 10 percent of sales. Debtor levels at the end of September are £400,000 and the investment in stock is £350,000

Required:

a. Prepare a cash budget for October, November and December, and state if the firm will be able to purchase the new equipment.

b. Recommend action that could be taken to improve the working capital position of Whitborrow.

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