PSAF – Nov 2016 – L2 – Q3 – The Budgeting Process in the Public Sector

This question covers the preparation of a cash flow projection for the first quarter of 2015 for a housing corporation, alongside an analysis of recurrent expenditure.

Question

The Atlantic Staff Housing Corporation is preparing its budget for 2015. You have been engaged as a Consultant to the Corporation to assist in the preparation of the budget. The following information has been made available:

The total annual subventions from the Federal Government in 2014 was N36,000,000. There is an expectation that this amount will increase by 10% in the year 2015. The expected 10% increase will be received in the first six months of the year along with the normal monthly allocations.
The management has decided to reduce transport and travelling by 5% in the year 2015. The total amount in 2014 was N3,780,000, and the expense will accrue evenly throughout the year.
Capital grant of N14 million is expected in February, May, and November.
Salaries and wages for 2014 were N28 million. In 2015, salaries and wages will increase by 12.5% of the amount paid in 2014. Housing allowance is 33% of salaries and wages.
Ground rent for industrial estates will be received as follows: January N2.8 million, February N1.5 million, and March N2.08 million.
The training and development expenses of N700,000 are to increase by 10% in the year 2015. The total amount will be spent on an equal basis in February and October 2015.

The Corporation will commence construction of 100 low-cost housing units in the year 2015. The following are the commitments through LPOs in 2014, which will be met in the New Year:

Date Purchased	Particulars	LPOs	Time to Pay	Amount (N’Million)
15/08/2014	Cement	121	February	9.5
15/09/2014	Iron-rod	111	March	2.8
31/10/2014	Gravels	120	30/01/2015	1.5
01/11/2014	Plumbing Materials	122	20/02/2015	0.75
05/12/2014	Sands	119	March	1.2513

Rent receivable from the shopping complex of the Corporation will be: January N1.7 million, February N1.5 million, and March N2.5 million.
The cash balance as of December 31, 2014, was N1.5 million.

Required:

a. Prepare a cash flow projection for the first quarter of the year 2015.
(15 Marks)

b. Calculate the ratio of recurrent expenditure to total inflow for each month and make a brief comment on the ratio.
(5 Marks)
(Total 20 Marks)

Answer

a. Cash Flow Projection for the First Quarter of 2015

Details	January (N)	February (N)	March (N)
Inflow
Annual Subventions	3,600,000	3,600,000	3,600,000
Capital Grant	–	14,000,000	–
Ground Rent	2,800,000	1,500,000	2,080,000
Rent Receivable	1,700,000	1,500,000	2,500,000
Total Inflow (A)	8,100,000	20,600,000	8,180,000
Outflow
Recurrent
Transport & Travelling	299,250	299,250	299,250
Salaries & Wages	2,625,000	2,625,000	2,625,000
Housing Allowance	866,250	866,250	866,250
Training & Development	–	385,000	–
Total Recurrent (B)	3,790,500	4,175,500	3,790,500
Capital
Cement	–	9,500,000	–
Iron-rod	–	–	2,800,000
Gravels	1,500,000	–	–
Plumbing Materials	–	750,000	–
Sands	–	–	1,251,300
Total Capital (C)	1,500,000	10,250,000	4,051,300
Total Outflow (D)	5,290,500	14,425,500	7,841,800
Cash B/F	1,500,000	4,309,500	10,484,000
A – D	2,809,500	6,174,500	338,200
Cash C/F	4,309,500	10,484,000	10,822,200

b. Ratio of Recurrent Expenditure to Total Inflow

Month	Recurrent Expenditure (N)	Total Inflow (N)	Ratio
January	3,790,500	8,100,000	1:2.14
February	4,175,500	20,600,000	1:4.93
March	3,790,500	8,180,000	1:2.16

Comment:
The recurrent expenditure to total inflow ratio shows that February had a relatively lower recurrent expenditure ratio due to higher cash inflows from capital grants. January and March had average ratios, indicating steady cash flow, but still left significant amounts of excess cash that could be considered for short-term investments.

Tags: Budgeting, Capital Grant, Cash Flow, Government Subvention, Recurrent Expenditure
Level: Level 2

Topic: The Budgeting Process in the Public Sector
Series: NOV 2016

Uploader: Kwame Aikins