Question

DeLux Brothers (Pty) Ltd intends to expand its Palapye based operations by acquiring a new plant.

The Finance Manger has been asked by the owners of the company to prepare cash flow forecasts

for the business for the period December 2017 to May 2018. The marketing department has

prepared the following forecasts

Month                                         Sales BWP

October 2017 – Actual                    180 000

November                                       180 000

December                                    360 000

January 2018                                450 000

February                                         500 000

March                                            360 000

April                                            360 000

May                                            280 000

Collection estimates from the credit department are as follows:

O Collections within the month of sale (cash sales) – 10%

O Collection in the month following the sale – 75%

O Collection in the second month following the sale – 15%

Total labour and raw materials costs are estimated for each month as follows:

Month                                                     BWP

December 2017                                     216 000

January 2018                                       270 000

February                                             300 000

March                                               250 000

April                                                216 000

May                                                168 000

General and administrative expenses will amount to approximately P27 000 per month, lease

payments will amount to P9 000 per month; depreciation will be P34 000 per month; miscellaneous

payments will be 2 700 per month; income tax payment of P300 000 will be due in March 2018 and

a deposit of P180 000 on a new vehicle will be required in December 2017. The bank charges

interest on overdraft of 7% (assume the interest is charged on closing balance for the previous

month). The cash balance at the end of November will be P40 000.

Required:

a) Prepare a cash budget for the period December 2017 to May 2018 (21 marks)

b) Briefly outline any five advantages of a zero based budgeting (ZBB) (5 marks

Answer 1

		October	November	December	January	February	March	April	May
	Sales (BWP)	180,000	180,000	360,000	450,000	500,000	360,000	360,000	280,000
A	Opening balance of cash			40,000	-	-	-	-	-
	Sales realisations
	Cash sale	18,000	18,000	36,000	45,000	50,000	36,000	36,000	28,000	10% of sales
	Collection in the month following the sale		135,000	135,000	270,000	337,500	375,000	270,000	270,000	75% of previous month's sales
	Collection in the second month following the sale			27,000	27,000	54,000	67,500	75,000	54,000
B	Total cash receipts	18,000	153,000	198,000	342,000	441,500	478,500	381,000	352,000
	Total labour and raw materials costs			216,000	270,000	300,000	250,000	216,000	168,000
	General and administrative expenses	27,000	27,000	27,000	27,000	27,000	27,000	27,000	27,000
	Lease payments	9,000	9,000	9,000	9,000	9,000	9,000	9,000	9,000
	Depreciation	-	-	-	-	-	-	-	-	It is non cash expense
	Miscellaneous payments	2,700	2,700	2,700	2,700	2,700	2,700	2,700	2,700
	Deposit for vehicle			180,000
	Income tax payment						300,000
	Interest				13,769	12,402	6,074	14,213	6,367
					(7%*196700)	(7%*177,169)	(7%*86,771)	(7%*203045)	(7%*90958)
C	Total cash payments			434,700	322,469	351,102	594,774	268,913	213,067
A+B-C	Cash balance before Bank o/d		40,000	(196,700)	19,531	90,398	(116,274)	112,087	138,933
			(given)
	Bank o/d		-	196,700	177,169	86771	203045	90958	-
			(assumed)		(196700-19531)	(177169-90398)	(86771+116274)	(203045-112087)
	Cash balance after Bank o/d		40,000.00	-	-	-	-	-
									47975
									(138933-90958)

b) Advantages

There is more focus on operations.

It helps in lowering the costs

Careful and disciplined execution.

Efficient allocation of resources, as it is based on needs and benefits

This type of budgeting detects inflated budgets

This eliminates waste thereby reducing overall costs.

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