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

Download file to see previous pages However, there is one concern that the company must give a serious consideration. There is a 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 the future. Cash flow and the profit are two different things. While the ultimate aim of any business is to earn the 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. 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 the 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 £ ...Download file to see next pagesRead More