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.
I what he should do for every month ?

it is 8750

Answer 1

Answer has been given below.

Please note this answer is given based on certain assumptions to help understand the concept.

Finance Director and his team have to negotiate short term facility with the bank The short term facility should be available at beginning of the month and repayment at the end of the month The short term facility should be repaid whenever there is excess cash balance in the books so that interest cost is minimised The short term facility will be a bridge between cash flow and cash balance needed The below is some working on assumptions to understand what can be done Assuming positive balance of cash is needed April May Total Receipts $80,400 $78,500 June $106,000 July $130,500 Total $395,400 $48,725 $29,775 $1,750 $106,425 -$425 $123,400 -$43,000 $8,750 $36,000 $53,800 $76,700 $500 Total payment Net Cash flow Opening balance (+) Borrowing (+) Interest payment (-) Repayment (-) Closing balance $925 $332,350 $63,050 $8,750 $36,000 -$840 -$36,000 $70,960 -$600 -$30,000 $925 -$2400 -$6,000 $70,960 $1,750 $500 Interest calculation = 1% on $30,000 for 2 month = $600 Interest calculation = 1% on $6,000 for 4 month = $240 Assuming balance of $5,000 is needed every month April May June Total Receipts $80,400 $78,500 $106,000 July $130,500 Total $395,400 $123,400 -$43,000 $8,750 $41,000 $48,725 $29,775 $6,750 $106,425 -$425 $5,925 Total payment Net Cash flow Opening balance (+) Borrowing (+) Interest payment (-) Repayment (-) Closing balance $53,800 $76,700 $5,500 $332,350 $63,050 $8,750 $41,000 -$1,040 -$41,000 $70,760 -$600 -$30,000 $5,925 -$440 $11,000 $70,760 $6,750 $5,500 Interest calculation = 1% on $30,000 for 2 month = $600 Interest calculation = 1% on $11,000 for 4 month = $440