Assignment Title: Cash Budgeting

Description of the Assignment

Devise a Cash Budget for Jordan Ltd., detailing the company’s cash inflows and outflows for a 6-month period.

The primary purpose of this document is to provide the Board of Directors of the company with the status of the company’s cash position at any point in time.

Provide detailed insights into the cash performance of the company, identifying any areas of concern that the Board of Directors needs to be aware of and what you, as the accountant of the company would recommend they implement as remedial measures to rectify any periods when it is anticipated that there will be a cash deficit in the company bank account.

As the Board of Directors is predominantly non-finance professionals, you need to explain to them the difference between cash flow and profits of an organization.

Notes:
1. Give consideration to the presentation of the report.
2. The report will be submitted on the firm understanding that the report is the student’s own work and has not been taken from the work of others except where material used has been clearly referenced.

Educational Objectives. (Cite relevance to other subjects if appropriate)

• Allow the student to formulate the Cash Budget for a company, including commentary on the cash position of the company with the identification of measures that could be implemented to rectify any anticipated periods of cash deficits.

Question

You have recently been appointed as Financial Controller to Jordan Ltd, a construction firm, currently suffering a substantial slump in business. The budget for next year indicates a worsening financial situation during the year, leading to a likely deficit at the end of the year.

You are concerned about the effectiveness of financial control within the company, especially given the lack of a systematic cash budget for the firm’s operations. You have been requested by the Board of Directors to introduce a cash budgeting system for the firm.

In order that a cash budget can be drawn up for the period April-September next year the following information on likely transactions is available:

Month	Cash Purchases €/£	Credit Purchases €/£	Cash Sales €/£	Credit Sales €/£
JanFebMarAprMayJuneJulyAugSept	400400500600200700300500400	8,0007,0007,5008,0009,00010,50010,00011,00011,000	3507001,0001,4008005007001,0001,100	6,0009,0008,0008,0009,0008,5008,0009,0008,000

Other information has also been provided:

1. The monthly wage bill is currently €/£2,000. This is paid in the month incurred. However, due to retirement on 30 April, ¼ of this can be saved. It is unlikely that a permanent replacement will be sought, however, some temporary labor will be required, estimated at €/£200 a month, paid a month in arrears. This will be required as soon as retirement has occurred.
2. Company fixed overheads are budgeted for €/£1,200 a month, which includes an annual depreciation provision of €/£2,400. These are paid in the month incurred.
3. Selling and administrative expenses amount to 5% of that month’s total sales value. These are paid when the sales are made.
4. Trade Payables are normally paid one month after the receipt of goods.
5. Trade Receivables normally pay up as follows: 40% in the month of sale, 50% in the month after the sale, and 10% in the month after that.
6. The cash balance at 31 March is likely to be €/£6,000.

Requirements:

Prepare a report for the Board of Directors of Jordan Ltd., including the following:

a) The Cash Budget for the 6-month period April to September inclusive, clearly indicating the cash position at the end of each month.
b) Commentary on the cash position of the company, highlighting any areas of significance or potential problems
c) Recommend proposed solutions to any problem areas identified)
d) Explain why there is a difference between cash flow and profit in a company