Question

The management of a local organization is considering starting an income generating project to improve its financial position and improve the quality of services it is rendering to the community. The Board of Directors requested your help in preparing an operating budget including a cash budget for the six months ending 31/12/22020. The Board of Directors has promised to secure $100,000 for this project if it proves to be profitable. You gathered the following information: • $100,000 is expected to be secured by the Board of Directors and the project will start on 1/7/2020. A building will be rented at an annual rent fee of $24,000. It is expected that the rent of the first three months will be paid in advance. It is expected that utilities will be $5,000 per quarter payable at the beginning of the following quarter. Equipment will be purchased for $79,200. 50% will be paid at the time of purchase i.e. in July 2020 and 50% in October 2020. The estimated useful life of this equipment is 4 years. • Furniture will be purchased for $4,080 in July 2020. The estimated useful life of this equipment is 2 years. A vehicle will purchased for $8,160 in July 2020. Annual insurance is $1,500 payable in July 2020. estimated useful life of the vehicle is 4 years. It is estimated that raw materials usage average $25,000 monthly. also estimated that purchases of raw materials will be $50,000 in July 2020, $60,000 in September 2020, and $60,000 in November 2020. It is expected that the payment of supplies will be made in the month following the purchase. Salaries are expected to be $2,000/month for the first quarter and $3,000 per month for the second quarter. • Other operating expenses estimated at $2,500 per month. • Market analysis showed the following sales estimates. Sales will be on credit with collections after 2 months of sales. July 16 Aug 16 20,000 Oct 16 50,000 Nov 16 Dec 16 Estimated Sales in $ Sept 16 30,000 100,000 100,000 Required: Prepare in good form a. A profit and loss budget for the 6 months ending 31/12/2020. b. A balance sheet budget as at 31/12/2020 C. A cash flow budget for the 6 months ending 31/12/2020. d. As a Board of Director Member would you approve to fund the project. Why?​

Answer 1

An operating budget, a balance sheet budget, and a cash flow budget are required for a potential income-generating project of a local organization. These budgets would account for costs, revenues, depreciation, and cash flow timing to assess profitability and inform the Board's funding decision.

Step-by-step explanation:

The task at hand involves preparing a profit and loss budget, a balance sheet budget, and a cash flow budget for the six months ending 31/12/2020 for a local organization considering an income-generating project. Given the information provided, we would need to compile all costs and revenues to ascertain the project's profitability.

To begin, the operating budget would require the calculation of depreciation for both the equipment and the vehicle, the prediction of cash inflows from sales, and the consideration of operating expenses, including rent, utilities, salaries, equipment, and furniture purchases.

The cash flow budget would require attention to the timing of cash receipts and payments, as it is crucial for understanding liquidity over the six-month period. One must take into account the initial $100,000 secured by the Board of Directors, the payment schedule for equipment and raw material purchases, and the delay in sales collections.

Moreover, operating expenses including rent, utilities, and salaries need to be incorporated in the relevant months as per the terms provided.

Lastly, weighted consideration of the financial forecasts and an evaluation of the project's potential return on investment would inform the decision-making process for a Board of Director member when determining whether to approve the funding.

Professional analysis would consider the cost of capital, the projected profitability of the project, and the organization's capacity for risk.