Finance and Business Perfomance Assignment: Budget for Dares Paint Limited - Coursework Example

Q1. Cash budget for Dare’s Paints Ltd. Is presented in the following table: Budget for Dare’s Paint Limited (All figures are in January February March April Totals Receipts Cash sales 12000 15000 8000 9500 44500 Credit sales 40000 48000 60000 32000 180000 Total receipts 52000 63000 68000 41500 224500 Expenses Fixed costs 13000 13000 13000 13000 52000 Direct labour 7000 7000 5500 6250 25750 Raw materials 20000 24000 28000 28000 100000 Variable overheads 2800 2800 2200 2500 10300 Lease 800 800 800 800 3200 Loan 0 0 10000 0 10000 Total expenses 43600 47600 59500 50550 201250 Opening balance 80000 88400 103800 112300 80000 Add receipts 52000 63000 68000 41500 224500 Less expenses 43600 47600 59500 50550 201250 Closing Balance 88400 103800 112300 103250 103250 Calculations for arriving at the projected budget for the company: Calculations for January Receipts Cash Sales = 20% of January sales = 0.20*January sales volume (lit)*sales price (£/lit) = 0.20*1200*50 £ = 12000 £ This is because only 20% of current month’s sales are Cash sales. Credit Sales = 80% of December sales = 0.80*December sales volume (lit)*sales price (£/lit) = 0.80*1000*50 £ = 40000 £ This is because 80% of last month’s sales was on credit is realized in this month. Total Receipts = Cash Sales + Credit Sales = 12000 £ + 40000 £ = 52000 £ Expenses Fixed cost = Fixed cost – Depreciation = 15000 £ - 2000 £ = 13000 £ Depreciation has been deducted as this cost does not take out the amount marked for depreciation from the cash flow. Therefore, this cash is still in the business. Direct Labour Cost = January Production in lit * Direct Labour Cost in £/lit = 1400 * 5 £ = 7000 £ Raw Materials’ Cost = November’s Production (lit) * Cost of Raw Material per lit = 1000 * 20 £ = 20000 £ This is because raw material is purchased on two month’s credit and therefore the raw material procured in November will be paid in January. Variable Overheads = January Production in lit * Variable Overhead in £/lit = 1400 * 2 £ = 2800 £ Lease = 800 £ Loan = Nil as no loan is to be paid in January. Total Expenses = Fixed Cost + Direct Labour + Raw Materials + Variable Overheads + Plus Lease + Loan = 13000 £ + 7000 £ + 20000 £ + 2800 £ + 800 £ + 0 = 43600 £ Opening Balance = 80000 £ Closing Balance = Opening Balance + Receipts – Expenses = 80000 £ + 52000 £ - 43600 £ = 88400 £ Calculations for February Receipts Cash Sales = 20% of February sales = 0.20*February sales volume (lit)*sales price (£/lit) = 0.20*1500*50 £ = 15000 £ This is because only 20% of current month’s sales are Cash sales. Credit Sales = 80% of January sales = 0.80*January sales volume (lit)*sales price (£/lit) = 0.80*1200*50 £ = 48000 £ This is because 80% of last month’s sales was on credit is realized in this month. Total Receipts = Cash Sales + Credit Sales = 15000 £ + 48000 £ = 63000 £ Expenses Fixed cost = Fixed cost – Depreciation = 15000 £ - 2000 £ = 13000 £ Depreciation has been deducted as this cost does not take out the amount marked for depreciation from the cash flow. Therefore, this cash is still in the business. Direct Labour Cost = February Production in lit * Direct Labour Cost in £/lit = 1400 * 5 £ = 7000 £ Raw Materials’ Cost = December’s Production (lit) * Cost of Raw Material per lit = 1200 * 20 £ = 24000 £ This is because raw material is purchased on two month’s credit and therefore the raw material procured in December will be paid in February. Variable Overheads = February Production in lit * Variable Overhead in £/lit = 1400 * 2 £ = 2800 £ Lease = 800 £ Loan = Nil as no loan is to be paid in February. Total Expenses = Fixed Cost + Direct Labour + Raw Materials + Variable Overheads + Plus Lease + Loan = 13000 £ + 7000 £ + 24000 £ + 2800 £ + 800 £ + 0 = 47600 £ Opening Balance = Closing Balance of January = 88400 £ Closing Balance = Opening Balance + Receipts – Expenses = 88400 £ + 63000 £ - 47600 £ = 103800 £ Calculations for March Receipts Cash Sales = 20% of March sales = 0.20*March sales volume (lit)*sales price (£/lit) = 0.20*800*50 £ = 8000 £ This is because only 20% of current month’s sales are Cash sales. Credit Sales = 80% of February sales = 0.80*February sales volume (lit)*sales price (£/lit) = 0.80*1500*50 £ = 60000 £ This is because 80% of last month’s sales was on credit is realized in this month. Total Receipts = Cash Sales + Credit Sales = 8000 £ + 60000 £ = 68000 £ Expenses Fixed cost = Fixed cost – Depreciation = 15000 £ - 2000 £ = 13000 £ Depreciation has been deducted as this cost does not take out the amount marked for depreciation from the cash flow. Therefore, this cash is still in the business. Direct Labour Cost = March Production in lit * Direct Labour Cost in £/lit = 1100 * 5 £ = 5500 £ Raw Materials’ Cost = January’s Production (lit) * Cost of Raw Material per lit = 1400 * 20 £ = 28000 £ This is because raw material is purchased on two month’s credit and therefore the raw material procured in January will be paid in February. Variable Overheads = March Production in lit * Variable Overhead in £/lit = 1100 * 2 £ = 2200 £ Lease = 800 £ Loan = 10000 £ This loan amount is to be paid in March. Total Expenses = Fixed Cost + Direct Labour + Raw Materials + Variable Overheads + Plus Lease + Loan = 13000 £ + 5500 £ + 28000 £ + 2200 £ + 800 £ + 10000 £ = 59500 £ Opening Balance = Closing Balance of February = 103400 £ Closing Balance = Opening Balance + Receipts – Expenses = 103800 £ + 68000 £ - 59500 £ = 112300 £ Calculations for April Receipts Cash Sales = 20% of April sales = 0.20*April sales volume (lit)*sales price (£/lit) = 0.20*950*50 £ = 9500 £ This is because only 20% of current month’s sales are Cash sales. Credit Sales = 80% of March sales = 0.80*March sales volume (lit)*sales price (£/lit) = 0.80*800*50 £ = 32000 £ This is because 80% of last month’s sales was on credit is realized in this month. Total Receipts = Cash Sales + Credit Sales = 9500 £ + 32000 £ = 41500 £ Expenses Fixed cost = Fixed cost – Depreciation = 15000 £ - 2000 £ = 13000 £ Depreciation has been deducted as this cost does not take out the amount marked for depreciation from the cash flow. Therefore, this cash is still in the business. Direct Labour Cost = April Production in lit * Direct Labour Cost in £/lit = 1250 * 5 £ = 6250 £ Raw Materials’ Cost = February’s Production (lit) * Cost of Raw Material per lit = 1400 * 20 £ = 28000 £ This is because raw material is purchased on two month’s credit and therefore the raw material procured in February will be paid in February. Variable Overheads = April Production in lit * Variable Overhead in £/lit = 1250 * 2 £ = 2500 £ Lease = 800 £ Loan = 0 No loan is to be paid in April. Total Expenses = Fixed Cost + Direct Labour + Raw Materials + Variable Overheads + Plus Lease + Loan = 13000 £ + 6250 £ + 28000 £ + 2500 £ + 800 £ + 0 £ = 50550 £ Opening Balance = Closing Balance of March = 112300 £ Closing Balance = Opening Balance + Receipts – Expenses = 112300 £ + 41500 £ - 50550 £ = 103250 £ Q2. Financial health of the company based on the cash flow forecast is reasonably good as the company is having a positive cash flow. Therefore, the company is expected to remain solvent and will not have to resort on short term debt. Here one can clearly see the advantage of selling (the product) on shorter credit period and buying the raw material on longer credit period. However, there is one concern that the company must give a serious consideration. There is reasonably large gap in production and sales volume in a month. This will lead not only to huge inventory, managing of which will require significant cost, but also the future outgo on the account of materials cost will increase in comparison with the sales receipts and future cash flow may turn negative. Already the April’s net cash flow has turned negative on this account. Therefore, the company must address this issue for maintaining healthy financials in future. Q3. Cash flow and the profit are two different things. While ultimate aim of any business is to earn profit, this can be achieved only through a healthy cash flow. Relation of a cash flow and the business is very much like that of fuel and a vehicle. Cash flow is like the fuel on which runs a business, profitable or otherwise. It is preferred that cash flow remains positive, so that business remains solvent i.e. there is no chance of stopping the business for the want of capital. If cash flow is not positive then the firm will have to rely heavily on short term borrowings, interest on which may eat the profit significantly and also in the adverse circumstances the company will have to pay unreasonably high interest only to run the business. We can take another analogy from chemical reactions. Profit for a business is like the free energy change associated with a reaction. Like free energy change has to be negative for a chemical reaction to be feasible, similarly, profit is must for doing a business. Nobody will like to go for a loss making business; rather everybody will like to go for a profitable business. Therefore, profit is necessary criteria for carrying out a business. But is it a sufficient criterion. If one can conceive a profit making business, can he or she necessarily do the business? This will depend on the kind of cash flow he can manage in the business. The cash flow for a business is much like activation energy or kinetic barrier for a chemical reaction. Even if a reaction is feasible by the thermodynamic criteria or free energy considerations it can not take place unless there is a favourable kinetics associate with it. Similarly a positive business cannot be run unless a healthy cash flow is part and parcel of the business. Which one is more important? While both are important I feel cash flow is more important. This is because only if one can run a business; he or she can think of profit or loss. Therefore, it is important first to see if the business can be run and then to if how profit can be made. One can even afford to sacrifice on profit for initial couple of years if he can manage to have a healthy cash flow only to sustain a potentially profitable business for the period when it becomes profit making. Therefore, cash flow is certainly more important than the profit. This is the reason why firms are will even lose on the profit margins by a couple of basis points if it helps in maintaining a healthy cash flow. Read More