Question

You are the co-founder of ABC T-Shirts Limited, a T-shirt clothing company that has been trading for the past three years with limited success. You have now made the decision to seek external investment into the company to expand into sports equipment market. As part of the due diligence process, potential investors have asked you to prepare a cash flow statement for the first quarter 2017. Your records show ABC T-Shirts Limited will have the following balances on the 1st January 2017: Bank overdraft €100,000 Debtors €150,000 Creditors €50,000 In addition, you anticipate the following transactions during the next three months i. New bank loan of €100,000 to cover present overdraft on the 1" January 2017 to be repaid €25,000 every quarter starting 31" March 2017. ii. Sales and purchases on one month's credit as follows: Sales Purchases Purce January €300,000 €100,000 February €360,000 €120,000 March €480,000 €160,000 iii. Payroll costs of €50,000 in January and February, rising to €60,000 for March iv. Internal R&D costs as follows: January €100,000 February €120.000 March €150.000 V. Advertising & Promotion costs of €5,000 per month, with an additional charge of €10,000 in March to cover the launch of the summer collection. vi. Debtors and creditors must cleared within the month. vii. An external marketing consultant will be hired in February for €20,000, paid equally in two instalments in March and May 2017 respectively. Required: a) Prepare a cash budget for the three month period ending 31" March 2017. b) What level of investment would be required in order to have a closing balance of the 31 March 2016 of €500,000? c) Does ABC T-Shirts Limited need the €100,000 loan to cover the bank overdraft? Why? d) For a company making T-Shirts, what form of IP protection would be the most relevant, and why? e) What are the advantages or preparing a cash flow statement?

Answer 1

Ans (a).

Cash Budget for 3 months ending on 31-Mar-17

	Particulars	Jan	Feb	Mar
	Opening Balance	-100,000	-55,000	-30,000
Add:	Collection from Debtors	150,000	300,000	360,000
Add:	New Loan taken	100,000	Nil	Nil
Less:	Payment to Creditors	50,000	100,000	120,000
Less:	Repayment of loan	Nil	Nil	25,000
Less:	Payroll Cost	50,000	50,000	60,000
Less:	Internal R&D	100,000	120,000	150,000
Less:	Advertising & Promotion Cost	5,000	5,000	15,000
Less:	External Marketing Consultant	Nil	Nil	10,000
	Closing Balance	-55,000	-30,000	-50,000

Ans (b). The level of investment required in order to have a closing balance of €500,000 will be €550,000.

Ans (c). We can see that the cash balance of ABC T-shirts Ltd has been negative throughout. However, this negative balance has been improving. Therefore, ABC T-shirt Ltd may not require a loan of €100,000 to cover the overdraft.

Ans (d). TradeMark can be the best form of IP protection for garments because a trademark is any word, name, symbol, device, or combination thereof that is used by a merchant used to identify their goods and distinguish them from those manufactured and sold by other merchants.

Ans (e). Cash flow statement serves the following advantages: * It shows inflow and outflow of cash and cash equivalents from various activities of a company        * It helps in making economic decisions   * It helps in internal financial management * It helps in knowing the liquidity of the business.