Question

Marshall's Swords Ltd 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 30000 1 Mar 50,000 Apr 80,000 May 100,000 Jun 140,000 | Jul 150,000 Aug 180,000 SR | | 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.

Answer 1

In the budget produced above, we can see that the closing cash balance in the month of April, May and June is negative and hence we require the Finance Director to take the loan so that the net cash balance of these months can become positive. However the cash balance for the month of July is positive so no further action is required for this month.