Question

Alpha Ltd has appointed you as a manager in the budgeting department. The company has provided the following information to prepare a cash flow budget for the six months from the 1 January 2021 to 30 June 2021.

i. Alpha Ltd produces only one type of product and the projected selling price of the product is £2 for January and February and after that will be fixed at £3 for the foreseeable future.
ii. For the first three months of the year, 2,000 units will be sold per month. For the following three months, 2,500 units will be sold per month. Sales income is to be received in the month of sale.
iii. Insurance costs are £200 every two months. The company will pay for insurance on 1 December 2020.
iv. The company is paying 20% of sales of each month as bonus to the employees in the following month. The total sales during December 2020 will be £5,000.
v. Alpha Ltd will pay overhead costs of £2,000 each month.
vi. The opening cash balance at 1 January 2021 will be £1,000.
vii. The monthly cost of direct material and direct labour is estimated to be £500 and the company will pay them during each month.
viii. Fixed costs of production are £100 per month, payable in the month.

Required:
Prepare a cash flow budget for the period 1 January 2021 to 30 June 2021 and indicate the closing balance as at 30 June 2021.​

Answer 1

Answer and Explanation:

The preparation of the cash flow budget is presented below:

Cash Flow Budget

Particulars Jan 2021 Feb 2021 Mar 2021 Apr 2021 May 2021 Jun 2021

Opening Balance $1,000 $1,400 $2,000 $4,600 $8,300 $11,700

Sales $4,000 $4000 $6,000 $7,500 $7,500 $7,500

(2,000 × 2) (2,000 × 2) (2,000 × 3) (2,500 × 3) (2,500 × 3) (2,500 × 3)

Total Cash Inflow $5,000 $5,400 $8,000 $12,100 $15,800 $19,200

Less: Cash payments

Less: Bonus to employees $1,000 $800 $800 $800 $1,500 $1,500

(5,000 × 20% ) (4,000 × 20% ) (4,000 × 20% ) (4,000 × 20% ) (7,500 × 20% ) (7,500 × 20% )

Less: Overhead Cost 2,000 2,000 2,000 2,000 2,000 2,000

Less: Direct material & Direct Labor 500 500 500 500 500 500

Less: Fixed Cost 100 100 100 100 100 100

Net cash generated (A) 400 600 600 4100 3400 3400

Opening Cash balance (B) 1000 1400 2000 2600 6700 10100

Closing Balance (A+B) 1400 2000 4600 8300 11700 15100

Balance as on 30 June 2021 = 15100

We simply deduct all cash payments from the all cash receipts so that the ending balance or closing balance could come