Question

A company newly starting manufacturing operations on I January 2003 has made adequate arrangement for funds required for fixed assets. It wants you to prepare an estimate of funds required as working capital. It is to be remembered that:

a) In the first month there will be no sale, in the subsequent month sale will be 25% cash and 75% credit. Customer will be allowed one month credit.
b) Payments for purchase of raw materials will be made on one month credit basis.
c)
Wages will be paid fortnightly on the 22 and 7* of each month.
Other expenses will be paid one month in arrear except that 5% of selling expenses are to be paid immediately on sale being effected.
"The estimated sales and expenses for the first six months, spread evenly over the period subject to (a) above are as under:
Rs.
Sales
Material Consumed
Wages
Manufacturing Exp.
3,60,000
1.50.000
60.000
Rs.
Administrative Expenses
54,000
Selling Expenses
42.000
Depreciation on fixed assets
50.000
48.000
Budgeting and
Budgetary Control
The article produced is subject to excise duty equal to 10% of the selling price. The duty is payable on March 31, June 30, September 30, and December 31 for sales upto February 28, May 31, August 31 and November 30 respectively.
Prepare Cash Budget for each of the six months indicating the requirement of working
capital.

Answer 1

To prepare the cash budget for each of the six months, we need to estimate the cash inflows and outflows for each month based on the given information.

Month 1 (January):

• No sales
• No payments for raw materials
• Wages are paid on January 22 and February 7
• Other expenses are paid in February
• No excise duty payable

Cash inflow: 0

Cash outflow: 60,000 (wages)

Net cash flow: -60,000

Month 2 (February):

• Sales: 3,60,000 x 25% = 90,000 (cash), 3,60,000 x 75% = 2,70,000 (credit)
• Payments for raw materials: 1,50,000
• Wages are paid on February 22 and March 7
• Other expenses are paid in March
• 5% of selling expenses are paid immediately: 2,100 (5% of 42,000)
• No excise duty payable

Cash inflow: 90,000 (sales)

Cash outflow: 1,50,000 (raw materials), 60,000 (wages), 48,000 (manufacturing expenses), 54,000 (administrative expenses), 2,100 (selling expenses)

Net cash flow: -1,14,000

Month 3 (March):

• Sales: 2,70,000 (credit from previous month)
• Payments for raw materials: 1,50,000
• Wages are paid on March 22 and April 7
• Other expenses are paid in April
• Excise duty payable: 27,000 (10% of 2,70,000)

Cash inflow: 2,70,000 (sales)

Cash outflow: 1,50,000 (raw materials), 60,000 (wages), 48,000 (manufacturing expenses), 54,000 (administrative expenses), 27,000 (excise duty)

Net cash flow: -9,000

Month 4 (April):

• Sales: 2,70,000 (credit from previous month)
• Payments for raw materials: 1,50,000
• Wages are paid on April 22 and May 7
• Other expenses are paid in May
• No excise duty payable

Cash inflow: 2,70,000 (sales)

Cash outflow: 1,50,000 (raw materials), 60,000 (wages), 48,000 (manufacturing expenses), 54,000 (administrative expenses)

Net cash flow: -42,000

Month 5 (May):

• Sales: 2,70,000 (credit from previous month)
• Payments for raw materials: 1,50,000
• Wages are paid on May 22 and June 7
• Other expenses are paid in June
• 5% of selling expenses are paid immediately: 13,500 (5% of 2,70,000)
• Excise duty payable: 27,000 (10% of 2,70,000)

Cash inflow: 2,70,000 (sales)

Cash outflow: 1,50,000 (raw materials), 60,000 (wages), 48,000 (manufacturing expenses), 54,000 (administrative expenses), 13,500 (selling expenses), 27,000 (excise duty)

Net cash flow: -72,500

Month 6 (June):

• Sales: 2,70,000 (credit from previous month)
• Payments for raw materials: 1,50,000
• Wages are paid on June 22 and July 7
• Other expenses are paid in July
• No excise duty payable

Cash inflow: 2,70,000 (sales)

Cash outflow: 1,50,000 (raw materials), 60,000 (wages), 48,000 (manufacturing expenses), 54,000 (administrative expenses)

Net cash flow: -42,000

Based on the above calculations, the estimated working capital requirements for each month are as follows:

Month 1: -60,000

Month 2: -1,14,000

Month 3: -9,000

Month 4: -42,000

Month 5: -72,500

Month 6: -42,000

We can see that the company will require additional working capital in the first five months, with the highest requirement in the second month (-1,14,000). The company will have a surplus of working capital in the sixth month (-42,000). The company should arrange for adequate funds to meet the working capital requirements during the first five months to ensure smooth operations.