Reference no: EM132937204
Super Klin is a small business owned by Mr. Ken. He cleans construction sites using his team of five employees. The firm works on one job at a time. Mr Ken has just signed a contract with Tourbo company, to clean sites for the Mauritius tramway project.
Mr Ken understands the importance of careful cash budgeting and wants to prepare the cash budget for the next six months, from January to June 2018.
The following information has been obtained:
(i) Opening debtors are forecast to be $2,400, all of which will be received in January.
(ii) A price of $400,000 has been agreed for the contract. The amount will be paid in instalments as follows:
January 5%
February 15%
March 10%
April 10%
May 10%
June 50%
(iii) Opening creditors, which will be paid in January, are forecast to be as follows:
Materials $6,600
Miscellaneous $2,570
(iv) Five cleaners will be hired at the start of the job in January to level the land. They will be hired for the whole month at a cost of $1,200 each. The fee is payable in full on the first day of hire.
(v) Various materials are needed to complete the work and these will be purchased at different times over the six months. Materials have to be kept on the driveways of the properties during the cleaning process.
Since space is restricted, the following schedule of purchases has been drawn up:
Materials Month Purchased Amount Credit terms
A January $12,600 None
B February $2,200 One month
C February $3,100 One month
D March $85,000 Two months
E May $48,000 One month
F May $16,700 None
G Every month $2,000 per month None
Suppliers for materials D and E charge delivery costs but these are already included in the above amounts. Both key suppliers also give a 10% bulk order discount on any individual order that exceeds $40,000 in any given month. Mr Ken has not taken any bulk discounts into account when calculating the above figures.
(vi) A waste disposal company has agreed to remove waste throughout the six months at a total cost of $8,500. This must be paid in January.
(vii) Each of Mr Ken's five employees is paid a salary of $21,600 per annum. They are all paid on the last working day of each month for that month's work. Mr Ken has also agreed to give each worker a bonus of $1,500 in June for completion of the contract within the six-month period.
(viii) The firm uses three vans, which the five workers share. These are leased at an annual cost of $3,960 each, payable in equal monthly instalments on the first day of each month.
(x) Mr Ken's business account is expected to be overdrawn by $14,200 at the beginning of January.
Required:
Problem (a) Prepare a monthly cash budget for each of the six months to 30 June 2018, showing the cash balance at the end of each month. Assume that the contract is completed on time.
Problem (b) Outline the benefits of budgeting.