The Cash Flow Budget of Hidetoseek Company - Assignment Example

The Cash Flow Budget of Hidetoseek Company Table of Contents Table of Contents 1 Task 1 2 Task 2 4 Task 3 5 Task 4 6 Task 5 7 Bibliography 8 Task 1 Cash budget for the period of six months ending on November 30, 2010 Particulars June July August September October November Opening Balance (4,500.00) (9,754.60) (36,788.23) (23,232.09) (10,592.23) 1,117.77 Sales 18,500.00 16,500.00 18,000.00 17,000.00 20,000.00 18,000.00   14,000.00 6,745.40 (18,788.23) (6,232.09) 9,407.77 19,117.77               Purchase 12,400.00 35,000.00 - - - - Annual Factory Rent 4,000.00 4,000.00 - - 4,000.00 - Salaries and Wages Expenses 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 2,500.00 Cost of Heating and Lighting 360.00 360.00 360.00 360.00 360.00 360.00 Interest on capital and long term loan 650.00 650.00 650.00 650.00 650.00 650.00 General expenses 780.00 780.00 780.00 780.00 780.00 780.00 Tax Liability 3,000.00 - - - - - Total Expenses 23,690.00 43,290.00 4,290.00 4,290.00 8,290.00 4,290.00               Gross Balance/(Overdraft) (9,690.00) (36,544.60) (23,078.23) (10,522.09) 1,117.77 14,827.77 Less: Interest on Overdraft 64.60 243.63 153.85 70.15 - - Closing Balance/(Overdraft) (9,754.60) (36,788.23) (23,232.09) (10,592.23) 1,117.77 14,827.77 Note: Hidetoseek increase its overdraft limit beyond £ 25000. It is further assumed that rate of interest is same as before that is 8%. Task 2 The cash flow budget of Hidetoseek Company reveals that there will be huge liquidity problem in coming six months, the bank balance will not only be negative but also need overdraft for short term requirements especially for the working capital. The three issues can be as follows: The statement indicates negative balance which refers the liquidity problem. The reason behind it is the bulk purchase from the UK supplier, which will minimize the cost but will increase the loan burden. Next is the limit of overdraft which needs to be increased for continuing the operation of the business. This limit is only £ 25000 but the negative balance of cash flows shows that in the month of July, the balance (£ 36544) has crossed the limit. Therefore they have to think about any other source of short term loan. Another one issue is that, before adopting the option of bulk purchase the company should determine the amount of short term loan and their interest and they should compare it with the reduced cost. Because for cheap raw material if the company has to pay a huge amount of interest then it will be of no use. Task 3 The difference between the cash and profit mainly lies between the working capital cycles. The process of calculating net profit and cash flow is different from each other. Before explaining or pointing out the differences it will be beneficial to understand process of each method through the calculation of a particular month. In Task 1, the cash flow calculation has already been shown for the month of June now calculation of net profit can be shown. At first it required the calculation of closing stock which will be as follows. {(8500 + 35000) - (16500*100/170)} = 33795. The next step is to calculate the gross profit and it will be {(33795+16500) – (8500+35000)} = 6795. Now all the expenses should be deducted from it to calculate the net profit. Therefore net profit will be {6795- (1333+2500+360+650+780+30000)}= (1828) whereas the closing balance of cash flow was £ (9754). The above calculation depicts that not only the process but also the amount of sales, purchase and other expenses are different. Here, the actual amount of all those items has been taken where in case of cash flows only the amount which is collected or paid during this month has taken. More specifically it can be stated that cash flow consider only the cash inflow and outflow but while calculating the profit all the actual sales, purchase and expenses are taken into account. Cash flows determine the liquidity status of a company whereas profit indicates the general profitability of the company. Task 4 The machine that is needed to be installed for wallet manufacturing costs £ 120000. Such a heavy sum cannot be achieved through increment of short term loan. Therefore, the traditional way of financing can be opted. Equity and debt financing are two available options to the company. As the company already has loan therefore, they need to go for combined financing. Both having advantages and disadvantages as well which can be elaborated one after the other. Long term loan gains the tax benefit or deduction on its payment. Another benefit of it is that it does not increase the number of share holders. But debt also has certain disadvantages. The most important one is to increase the risk of the business as the company is bound to pay the interest of the loan even if they incur loss. Equity helps a company to improve its liquidity position through injection of fresh capital. It requires paying dividend to the shareholder but there is no hard and fast rule that the company have to pay in loss making years also. This source of financing is less risky as the company need not pay the amount to the investors. Regarding disadvantages, like debt financing it does not get any tax benefit and it also increase the number of shareholders. Task 5 Cost reduction can not be the only factor in the manufacturing or operating process of a company. There are various other factors. When a company shifts towards different set of suppliers, quality of the products is primarily affected. This happens because of the changes in the raw-material, as raw material is the core product in preparation of finished goods. Apart from quality, time is another important factor. Here, time refers to the scheduled arrival of the materials from the supplier’s side as it leads to timely delivery of the finished goods to the customers. Both these issues are applicable in case of Hidetoseek Ltd. This company is mainly dealing with the high-end customers, who are more stringent in this matter. Most of the cases of different companies revealed that with the changing supplier, delivery problem is the common issue. The reason behind it is the transportation media and system. Hidetoseek Ltd is planning purchasing of raw materials from the South American suppliers whereas presently they are sourcing from UK. As the supplier is from completely different country; therefore it will take huge time to create a strong bonding with the company. Not only the transportation system but also the legal, political and economical issues of that country are also matters of concern as the duties and taxes levied upon the goods, documentation or filling process, inflation are few other related issues while sourcing raw materials from any other country. Therefore, company should always keep in mind all these factors while choosing the suppliers. As the existing supplier is ready to reduce the cost, the company should not go for any other supplier especially with the affects of global slowdown. Bibliography Banerjee, B., 2005. Financial Policy And Management Accounting. PHI Learning Pvt. Ltd. Bhar, B.K., 1970. Cost Accounting. Academic Publishers. Dropkin, M. & Et. Al, 2007. The Budget-Building Book for Nonprofits: a step-by-step guide for Managers and Boards. John Wiley and Sons. Jawaharlal, 2002. Cost Accounting. Tata McGraw-Hill. Khan & Jain., 2000. Cost Accounting. Tata McGraw-Hill. Linzer, R & Linzer, A. 2006. The Cash Flow Solution: The Nonprofit Board Member's Guide to Financial Success. John Wiley and Sons. McMillan, E.J., 2010. Not-for-Profit Budgeting and Financial Management. John Wiley and Sons. Pizzey, A., 1989. Cost and Management Accounting: An Introduction for Students. SAGE. Rainsford, P. & Bangs, D.H., 2000. The Restaurant Start-up guide: a 12-month plan for Successfully Starting a Restaurant. Kaplan Publishing. Shim, J. K. & Siegel, J.G., 2005. Budgeting basics and beyond. John Wiley and Sons. Read More