- 20 Marks
Question
The following information relates to Impact Limited; a retailing outfit located in the Eastern region of Ghana. Month Sales (GHs’m) Wages incurred (GHs’m) Materials purchased (GHs’m) Overheads (GHs’m) January 70 12 40 25 February 90 14 45 20 March 120 20 50 32 April 100 18 70 28 May 140 24 60 36 June 120 20 50 32 July 100 18 50 28 August 100 18 60 28
The following additional information has been provided: a. It is expected that the cash balance on April 30, will be GH¢50m. b. Wages may be assumed to be paid within the month in which they are incurred. c. It is company’s policy to pay creditors for materials three months after receipts of the materials. d. Debtors are expected to pay two months after delivery to them. e. Included in the overhead figures is GH¢4m per month which represents depreciation on two cars and one delivery van. f. There is a delay in paying the overheads expenses by one month. g. 10% of the monthly sales are for cash and 90% are on credit. h. A commission of 5% is paid to agents on all sales on credit but this is not paid until the month following the sales to which it relates; this expense is not included in the overhead figures shown. i. It is intended to repay a loan of GH¢50m on June 30. j. Delivery is expected in May of a new machine costing GH¢85m of which GH¢25m will be paid on delivery and GH¢30m in each of the immediately following successive two months. k. Assume that overdraft facilities are available if required.
You are required to: Prepare a Cash budget for each of the three months of May, June and July.
Answer
A cash budget forecasts the cash inflows and outflows over a specific period, helping to determine the net cash position and identify potential surpluses or shortfalls. It is prepared by calculating expected cash receipts (primarily from sales) and cash payments (for expenses, purchases, and other outflows), then computing the net cash flow and adjusting the opening balance to find the closing balance for each month.
To arrive at the solution, follow these steps:
- Identify cash inflows (receipts):
- Cash sales: 10% of the current month’s sales.
- Receipts from debtors: 90% of sales from two months prior (since debtors pay two months after delivery).
- No other inflows are mentioned.
- Identify cash outflows (payments):
- Wages: Paid in the month incurred.
- Materials: Paid three months after purchase.
- Overheads: First, subtract the non-cash depreciation (GH¢4m per month) to get cash overheads. Then, pay one month in arrears.
- Commission: 5% on credit sales (which are 90% of total sales), paid one month after the sales month.
- Loan repayment: GH¢50m in June.
- Capital expenditure (machine): GH¢25m in May, GH¢30m in June, GH¢30m in July.
- No other outflows (e.g., no tax or dividends mentioned).
- Calculate net cash flow: Receipts minus payments for each month.
- Compute closing balance: Opening balance + net cash flow. The opening balance for May is GH¢50m. Subsequent months use the previous closing balance. Overdrafts are allowed, so negative balances are possible.
All figures are in GH¢’m (millions).
Workings:
- Receipts:
- May: Cash sales = 10% × 140 = 14; Debtors = 90% × 120 (March) = 108; Total = 122
- June: Cash sales = 10% × 120 = 12; Debtors = 90% × 100 (April) = 90; Total = 102
- July: Cash sales = 10% × 100 = 10; Debtors = 90% × 140 (May) = 126; Total = 136
- Payments – Wages:
- May: 24
- June: 20
- July: 18
- Payments – Materials:
- May: 45 (February)
- June: 50 (March)
- July: 70 (April)
- Payments – Overheads (cash portion, paid one month later):
- Cash overheads per month = Overheads – 4
- April cash overheads = 28 – 4 = 24 (paid in May)
- May = 36 – 4 = 32 (paid in June)
- June = 32 – 4 = 28 (paid in July)
- Payments – Commission (5% on credit sales, paid one month later):
- Credit sales = 90% of total sales
- April commission = 5% × (90% × 100) = 4.5 (paid in May)
- May = 5% × (90% × 140) = 6.3 (paid in June)
- June = 5% × (90% × 120) = 5.4 (paid in July)
- Other payments:
- Machine: May 25, June 30, July 30
- Loan: June 50
Cash Budget:
| Particulars | May (GH¢’m) | June (GH¢’m) | July (GH¢’m) |
|---|---|---|---|
| Opening balance | 50 | 49.5 | -36.8 |
| Receipts: | |||
| Cash sales | 14 | 12 | 10 |
| Receipts from debtors | 108 | 90 | 126 |
| Total receipts | 122 | 102 | 136 |
| Total cash available | 172 | 151.5 | 99.2 |
| Payments: | |||
| Wages | 24 | 20 | 18 |
| Materials | 45 | 50 | 70 |
| Overheads | 24 | 32 | 28 |
| Commission | 4.5 | 6.3 | 5.4 |
| Machine purchase | 25 | 30 | 30 |
| Loan repayment | – | 50 | – |
| Total payments | 122.5 | 188.3 | 151.4 |
| Net cash flow | -0.5 | -86.3 | -15.4 |
| Closing balance | 49.5 | -36.8 | -52.2 |
Notes on interpretation (practical insights):
- The company starts with a positive cash position but moves into overdraft in June and July due to high payments (loan repayment, machine installments, and increasing material payments).
- In a Ghanaian banking context, this highlights the need for liquidity management under BoG’s Liquidity Risk Management Guidelines. The company should monitor the cash operating cycle and consider negotiating better terms with creditors or accelerating debtor collections to avoid overdraft costs.
- Overdrafts, if used, must comply with BoG directives on interest rates and risk assessment, potentially impacting profitability if interest expenses rise.
- Series: APR 2023
- Uploader: Samuel Duah