Response to the following problem:
Linpet Ltd is to be incorporated on 1 June. The opening balance sheet of the business will then be as follows:
Assets £
Cash at bank 60,000
Share capital (£1 ordinary shares) 60,000
During June, the business intends to make payments of £40,000 for a leasehold property, £10,000 for equipment and £6,000 for a motor vehicle. The business will also purchase initial trading inventories costing £22,000 on credit.
The business has produced the following estimates:
(i) Sales revenue for June will be £8,000 and will increase at the rate of £3,000 a month until September. In October, sales revenue will rise to £22,000 and in subsequent months will be maintained at this figure.
(ii) The gross profit percentage on goods sold will be 25 per cent.
(iii) There is a risk that supplies of trading inventories will be interrupted towards the end of the accounting year. The business therefore intends to build up its initial level of inventories (£22,000) by purchasing £1,000 of inventories each month in addition to the monthly purchases necessary to satisfy monthly sales requirements. All purchases of inventories (including the initial inventories) will be on one month's credit.
(iv) Sales revenue will be divided equally between cash and credit sales. Credit customers are expected to pay two months after the sale is agreed.
(v) Wages and salaries will be £900 a month. Other overheads will be £500 a month for the first four months and £650 thereafter. Both types of expense will be payable when incurred.
(vi) Eighty per cent of sales revenue will be generated by salespeople who will receive 5 per cent commission on sales revenue. The commission is payable one month after the sale is agreed.
(vii) The business intends to purchase further equipment in November for £7,000 cash.
(viii) Depreciation is to be provided at the rate of 5 per cent a year on freehold property and 20 per cent a year on equipment. (Depreciation has not been included in the overheads mentioned in (v) above.)
Required:
(a) State why a cash budget is required for a business.
(b) Prepare a cash budget for Linpet Ltd for the six-month period to 30 November.