Assignment Task: Fancy Ltd. is a small company making plant pots. The company was established 2 years ago by Ravi and four of his college friends, when they graduated from Smarta College. The company supplies its products to a variety of small up market gardens centers. It has employed five people to help with the production of the pots. Ravi discussed the current situation of the company with the shareholders and they have agreed that it requires diversifying the business. Ravi is planning to acquire new equipment at the end of the year. This will require a deposit of RM10,000 in cash. Therefore, he needs to assess the financial situation of the company in the next four months. Ravi does not have any background in finance and accounting and is not sure if his financial planning is proper. He asks you to look at the financial situation of Fancy Ltd.:
The company sales in July are expected to be RM40,000 and it is predicted that it will rise at 10% every month till the end of the year. 50% of sales are usually paid in cash. Out of the remaining 30% is collected in the following month and the outstanding 20% the month after that.
As one of the machines has been replaced by a newer model, the company is intending to sell the old one for RM12,000 cash in September.
The purchases of raw materials are 40% of the sales of the previous month. The suppliers offer 5% discount if paid for within the month of purchase and normally 50% of purchases are so paid for; the remaining being paid in full the following month.
Wages consists of RM 3,500 and are paid each month.
General expenses are expected to be RM4,000 in September and October and RM3,500 November and December.
Fancy Ltd. declared a dividend of RM24,000. The company decided to pay the dividend in three equal installments in April, July, October.
Due to financial crisis Ravi had to make redundant two of his employees and a Redundancy Payment of RM 4,000 is due in October.
Corporate Income Tax is RM5,000 and it has to be paid at the end of October.
Ravi is planning a cash purchase of two new machines for total value of RM15,000 in October. The cash balance at end of August is RM8,000 and the company normally keeps minimum cash balance in the bank of RM3,000.
Required:
Q1. Prepare the cash budget for Fancy Ltd. for the period of September 2018 - December 2018 and briefly discuss your findings.
Q2. Advise managers on what are the actions that need to be taken to avoid cash deficit situation.
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