Prepare a cash budget for Joy for the six months period ended 31st December 2021. Comment on the results of Joy as shown by the budget you have prepared in (a) above, and suggest five (5) possible strategies the company must put in place to improve its cash position in the light of the plans to source a loan from ZANACO.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Joy is a company that manufactures a product called”Gladys”. The company is contemplating engaging an MBA graduate to manage its budgets. The following information is unveiled to you for the six months period ended 31st December 2021:
July August September October November December
Sales(Units) 480 520 640 750 700 600
Production(Units) 550 500 700 720 715 510
Additional data:
(i) The selling price per unit is set at K13,800 per unit for July, August and September and K14,900 for October, November and December.
(ii) The sales policy is to receive 65% of the sales value in the month of sale and the balance the month after sale.
(iii) Purchases for production are used in the month of purchase and paid for one month after purchase. The cost per unit has been set at K8,300 for July and August,K8,700 for September and October and K9,400 for November and December.
- iv) Wages and salaries have been set at K1.8 million for July and August, K2.2 million for September and October and K2.5million for November and December. The policy is to pay 75% in the month they are incurred and the balance the following month.
(v) Overheads are set at K1.3 million for July and are budgeted to rise by K60,000 per month thereafter up to and including December. Overheads are paid a month after they are incurred.
(vi) Machinery costing K7.8 million is to be acquired in August and the same month an initial cash deposit of 50% will be paid. The balance will be paid in four equal instalments commencing in November 2021.
(vii)
(viii) The company got an interest free loan amounting to K6.3 million in December 2013. The entire loan is to be liquidated in December 2021.
(ix) The closing cash balance as at 30 June 2021 was K1.3 million.
(x) The company is contemplating sourcing a loan from ZANACO Bank of K75 million to boost its operations. It hopes to liquidate this loan from its ordinary activities within a year.
Required:
- Prepare a
cash budget for Joy for the six months period ended 31st December 2021. - Comment on the results of Joy as shown by the budget you have prepared in (a) above, and suggest five (5) possible strategies the company must put in place to improve its cash position in the light of the plans to source a loan from ZANACO.
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