Helen is a sole trader who runs a small bakery. She wants to prepare a cash budget for the first quarter of the year (January to March) to manage her cash flows. You are provided with the following details: 1. Budgeted sales: November £10,000 December £12,000 January £15,000 February £16,000 March £18,000 40% of sales are cash sales, and the remaining 60% are credit sales. Credit customers pay 50% of their balance in the month following the sale and the remaining 50% two months after the sale. 2. Purchases each month are 60% of sales for that month. Helen purchases on credit and pays her suppliers 50% in the month following the purchase, and the remaining 50% two months later. 3. Helen plans to purchase new equipment worth £5,000 in February, payable in March. 4. Helen will make drawings of £500 per month starting in January. 5. The budgeted expenses figures for the three months as follows: Rent Salaries Utilities Other expenses January £2,000 £1,500 £500 £1,250 February March £2,000 £2,000 £1,500 £1,500 £550 £475 £1,200 £1,400 Rent, salaries and utilities are paid in cash in the month that they occur. 70% of other expenses are paid in the month they are incurred, 30% one month later. December other expenses are £1,100. 6. Helen maintains a minimum cash balance of £3,000. If the cash falls below this, she will arrange an overdraft. The opening cash balance at the beginning of January is £6,000. Required: a) Explain the purpose of a cash budget and how it helps a sole trader like Helen in managing her finances. b) Discuss the importance of maintaining a minimum cash balance for a business.
Helen is a sole trader who runs a small bakery. She wants to prepare a cash budget for the first quarter of the year (January to March) to manage her cash flows. You are provided with the following details: 1. Budgeted sales: November £10,000 December £12,000 January £15,000 February £16,000 March £18,000 40% of sales are cash sales, and the remaining 60% are credit sales. Credit customers pay 50% of their balance in the month following the sale and the remaining 50% two months after the sale. 2. Purchases each month are 60% of sales for that month. Helen purchases on credit and pays her suppliers 50% in the month following the purchase, and the remaining 50% two months later. 3. Helen plans to purchase new equipment worth £5,000 in February, payable in March. 4. Helen will make drawings of £500 per month starting in January. 5. The budgeted expenses figures for the three months as follows: Rent Salaries Utilities Other expenses January £2,000 £1,500 £500 £1,250 February March £2,000 £2,000 £1,500 £1,500 £550 £475 £1,200 £1,400 Rent, salaries and utilities are paid in cash in the month that they occur. 70% of other expenses are paid in the month they are incurred, 30% one month later. December other expenses are £1,100. 6. Helen maintains a minimum cash balance of £3,000. If the cash falls below this, she will arrange an overdraft. The opening cash balance at the beginning of January is £6,000. Required: a) Explain the purpose of a cash budget and how it helps a sole trader like Helen in managing her finances. b) Discuss the importance of maintaining a minimum cash balance for a business.
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
10th Edition
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter15: Working Capital Management
Section: Chapter Questions
Problem 10P: CASH BUDGETING Helen Bowers, owner of Helens Fashion Designs, is planning to request a line of...
Related questions
Question
Transcribed Image Text:Helen is a sole trader who runs a small bakery. She wants to prepare a cash budget for the first quarter
of the year (January to March) to manage her cash flows. You are provided with the following details:
1. Budgeted sales:
November
£10,000
December
£12,000
January
£15,000
February
£16,000
March
£18,000
40% of sales are cash sales, and the remaining 60% are credit sales. Credit customers pay 50% of
their balance in the month following the sale and the remaining 50% two months after the sale.
2. Purchases each month are 60% of sales for that month. Helen purchases on credit and pays her
suppliers 50% in the month following the purchase, and the remaining 50% two months later.
3. Helen plans to purchase new equipment worth £5,000 in February, payable in March.
4. Helen will make drawings of £500 per month starting in January.
5. The budgeted expenses figures for the three months as follows:
Rent
Salaries
Utilities
Other expenses
January
£2,000
£1,500
£500
£1,250
February
March
£2,000
£2,000
£1,500
£1,500
£550
£475
£1,200
£1,400
Rent, salaries and utilities are paid in cash in the month that they occur.
70% of other expenses are paid in the month they are incurred, 30% one month later. December
other expenses are £1,100.
6. Helen maintains a minimum cash balance of £3,000. If the cash falls below this, she will arrange
an overdraft. The opening cash balance at the beginning of January is £6,000.
Required:
a) Explain the purpose of a cash budget and how it helps a sole trader like Helen in managing her
finances.
b) Discuss the importance of maintaining a minimum cash balance for a business.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College