Business Accounting

Task 1: Michelle Harvey Business Cash flow Forecast

 

January February March April May June July August September October November December
Opening Balance b/f -£       102,400.00 -£   167,600.00 -£ 176,100.00 -£   185,400.00 -£ 193,900.00 -£ 202,400.00 -£     211,700.00

220,200.00

-£   228,800.00 -£   238,200.00 -£     246,800.00 -£   255,400.00
Cash Receipts
Sales £             – £       4,000.00 £       4,000.00 £     4,000.00 £     4,000.00 £         4,000.00 £       4,000.00 £       7,000.00 £       7,000.00 £         7,000.00 £       7,000.00 £           7,000.00
Total Inflows -£     102,400.00 £       4,000.00 £       4,000.00 £     4,000.00 £     4,000.00 £         4,000.00 £       4,000.00 £       7,000.00 £       7,000.00 £         7,000.00 £       7,000.00 £           7,000.00
Total Cash Receipts -£     102,400.00 -£   163,600.00 -£    172,100.00 -£ 181,400.00 -£ 189,900.00 -£     198,400.00 -£   207,700.00 -£   213,200.00 -£   221,800.00 -£     231,200.00 -£   239,800.00 -£       248,400.00
Cash Disbursements
Expenses
Wages £     5,400.00 £       5,400.00 £       5,400.00 £     5,400.00 £     5,400.00 £         5,400.00 £       5,400.00 £       5,400.00 £       5,400.00 £         5,400.00 £       5,400.00 £           5,400.00
Computer Leasing £     1,000.00 £       1,000.00 £       1,000.00 £     1,000.00 £     1,000.00 £         1,000.00 £       1,000.00 £       1,000.00 £       1,000.00 £         1,000.00 £       1,000.00 £           1,000.00
Travelling £       200.00 £         200.00 £         200.00 £         200.00 £         200.00 £           200.00 £           200.00 £           200.00 £           200.00 £           200.00 £         200.00 £             200.00
Fork Lift £ 12,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Advertising £       400.00 £         400.00 £         400.00 £         400.00 £         400.00 £           400.00 £           400.00 £           400.00 £           400.00 £           400.00 £         400.00 £             400.00
3 Vans £ 41,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Purchases £             – £       3,000.00 £       3,000.00 £     3,000.00 £     3,000.00 £         3,000.00 £       3,000.00 £       5,500.00 £       5,500.00 £         5,500.00 £       5,500.00 £           5,500.00
VAT £             – £         800.00 £         800.00 £         800.00 £         800.00 £           800.00 £           800.00 £       1,400.00 £       1,400.00 £         1,400.00 £       1,400.00 £           1,400.00
Furniture £     4,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Rent £     1,000.00 £       1,000.00 £       1,000.00 £     1,000.00 £     1,000.00 £         1,000.00 £       1,000.00 £       1,000.00 £       1,000.00 £         1,000.00 £       1,000.00 £           1,000.00
Bank Over Draft £             – £               – £         800.00 £               – £               – £           800.00 £                 – £                 – £           800.00 £                 – £               – £             800.00
Loan £         500.00 £         500.00 £         500.00 £         500.00 £           500.00 £           500.00 £           500.00 £           500.00 £           500.00 £         500.00 £             500.00
Rates £       200.00 £         200.00 £         200.00 £         200.00 £         200.00 £           200.00 £           200.00 £           200.00 £           200.00 £           200.00 £         200.00 £             200.00
Total Disbursements £ 65,200.00 £     12,500.00 £     13,300.00 £   12,500.00 £   12,500.00 £       13,300.00 £     12,500.00 £     15,600.00 £     16,400.00 £       15,600.00 £     15,600.00 £         16,400.00
Cash Surplus/ Deficit -£   167,600.00 -£ 176,100.00 -£   185,400.00 -£ 193,900.00 -£ 202,400.00 -£     211,700.00 -£   220,200.00 -£   228,800.00 -£   238,200.00 -£     246,800.00 -£   255,400.00 -£   264,800.00

 

Task 2

Forecasted cash flow analysis report

 

January February March April May June July August September October November December
Opening Balance b/f -£       102,400.00 -£   167,600.00 -£ 176,100.00 -£   185,400.00 -£ 193,900.00 -£ 202,400.00 -£     211,700.00

220,200.00

-£   228,800.00 -£   238,200.00 -£     246,800.00 -£   255,400.00
Cash Receipts
Sales £             – £       4,000.00 £       4,000.00 £     4,000.00 £     4,000.00 £         4,000.00 £       4,000.00 £       7,000.00 £       7,000.00 £         7,000.00 £       7,000.00 £           7,000.00
Total Inflows -£     102,400.00 £       4,000.00 £       4,000.00 £     4,000.00 £     4,000.00 £         4,000.00 £       4,000.00 £       7,000.00 £       7,000.00 £         7,000.00 £       7,000.00 £           7,000.00
Total Cash Receipts -£     102,400.00 -£   163,600.00 -£     172,100.00 -£ 181,400.00 -£ 189,900.00 -£     198,400.00 -£   207,700.00 -£   213,200.00 -£   221,800.00 -£     231,200.00 -£   239,800.00 -£       248,400.00
Cash Disbursements
Total Disbursements £ 65,200.00 £     12,500.00 £     13,300.00 £   12,500.00 £   12,500.00 £       13,300.00 £     12,500.00 £     15,600.00 £     16,400.00 £       15,600.00 £     15,600.00 £         16,400.00
Excess Cash/ Deficit -£   167,600.00 -£ 176,100.00 -£   185,400.00 -£ 193,900.00 -£ 202,400.00 -£     211,700.00 -£   220,200.00 -£   228,800.00 -£   238,200.00 -£     246,800.00 -£   255,400.00 -£   264,800.00

 

Interpretation

Cash flow problems may occur at Michelle Harvey’s business because she has a cash deficit throughout the entire financial year. This cash deficit implies that her business is not able to meet short term obligations as they fall due (Bodie et al, 2000). Short term obligations are those payments which need to be paid within a short period of time usually not beyond the current financial year. Examples of these obligations include interests on short term loans, bank overdrafts and payment to trade creditors.

These cash flow problems may have been caused by the high operating expenses incurred by Michelle Harvey’s business. These expenses are not commensurate to the sales level realised by these business hence they should be reviewed so that the liquidity is not compromised (Drury, 2012). The other factor which is contributing to the cash deficit in this business is the purchase of expensive capital assets at a go. These assets include the forklift, vans, computers and furniture. The assets consume most of the cash available to the firm hence the Michelle should consider planning for their purchases.

Planning in this case implies purchasing the assets in phases so that the liquidity level of this company is maintained at a reasonable level (Dean, 2011). The other solution available in order to solve the cash deficit issue in this firm is the borrowing of long term loan which will be used to purchase the capital assets of this business. This loan should be serviced for a period of not less than three years hence allowing for the availability of optimal cash balances to meet the short term obligations as they fall due. These assets should also be purchased during the month in which the loan is received from the financing institution so that the business operating cash is not used to purchase the capital assets.

Task 3

Second Cash Flow Forecast

Based on the recommendations in task 2, Michelle Harvey’s new cash flow forecast will look as follows;

First we compute the total cost of acquiring the capital assets so that we can ascertain the loan amount to be borrowed;

ASSET COST
Computer leasing 12,000
Fork Lift 12,000
3 Vans 41,000
Furniture 4,000
Contingencies 111,000
TOTAL 180,000

 

 

This thus implies that Michelle Harvey has to borrow a loan of 180,000 so that she may be in a position of purchasing all the capital requirements of her business. Michelle has to also factor in unforeseen expenses called contingencies when budgeting for her loan amount so that she may not run out cash when running her business.

The new cash flow forecast will look as follows;

January February March April May June July August September October November December
Opening Balance b/f £             – £   118,800.00 £   111,300.00 £ 103,000.00 £ 94,500.00 £     86,000.00 £   76,700.00 £   68,200.00 £   59,600.00 £     50,200.00 £   41,600.00 £       33,000.00
Receipts
Bank Loan £ 180,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Sales £             4,000.00 £     4,000.00 £     4,000.00 £   4,000.00 £   4,000.00 £       4,000.00 £     4,000.00 £     7,000.00 £     7,000.00 £       7,000.00 £     7,000.00 £         7,000.00
Total inflow £ 4,000.00 £     4,000.00 £     4,000.00 £   4,000.00 £   4,000.00 £       4,000.00 £     4,000.00 £     7,000.00 £     7,000.00 £       6,200.00 £     7,000.00 £         7,000.00
Total Cash Available £ 184,000.00 £   122,800.00 £     115,300.00 £ 107,000.00 £ 98,500.00 £     90,000.00 £   80,700.00 £   75,200.00 £   65,600.00 £     56,400.00 –   48,600.00 £     40,000.00
Expenses
Wages £   5,400.00 £     5,400.00 £     5,400.00 £   5,400.00 £   5,400.00 £       5,400.00 £     5,400.00 £     5,400.00 £     5,400.00 £       5,400.00 £     5,400.00 £         5,400.00
Computer Leasing £   12,000.00                      
Travelling £     200.00 £       200.00 £       200.00 £       200.00 £       200.00 £         200.00 £         200.00 £         200.00 £         200.00 £         200.00 £       200.00 £           200.00
Fork Lift £ 12,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Advertising £     400.00 £       400.00 £       400.00 £       400.00 £       400.00 £         400.00 £         400.00 £         400.00 £         400.00 £         400.00 £       400.00 £           400.00
3 Vans £ 41,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Purchases £             – £     3,000.00 £     3,000.00 £   3,000.00 £   3,000.00 £       3,000.00 £     3,000.00 £     5,500.00 £     5,500.00 £       5,500.00 £     5,500.00 £         5,500.00
VAT £             – £       800.00 £       800.00 £       800.00 £       800.00 £         800.00 £         800.00 £     1,400.00 £     1,400.00 £       1,400.00 £     1,400.00 £         1,400.00
Furniture £   4,000.00 £               – £               – £               – £               – £                 – £                 – £                 – £               – £                 – £               – £                   –
Rent £   1,000.00 £     1,000.00 £     1,000.00 £   1,000.00 £   1,000.00 £       1,000.00 £     1,000.00 £     1,000.00 £     1,000.00 £       1,000.00 £     1,000.00 £         1,000.00
Bank Over Draft £             – £               – £       800.00 £               – £               – £         800.00 £                 – £                 – £         800.00 £                 – £               – £           800.00
Loan £       500.00 £       500.00 £       500.00 £       500.00 £         500.00 £         500.00 £         500.00 £         500.00 £         500.00 £       500.00 £           500.00
Rates £     200.00 £       200.00 £       200.00 £       200.00 £       200.00 £         200.00 £         200.00 £         200.00 £         200.00 £         200.00 £       200.00 £           200.00
Total Expenses £ 65,200.00 £   11,500.00 £   12,300.00 £   12,500.00 £   12,500.00 £       13,300.00 £     12,500.00 £     15,600.00 £     16,400.00 £       15,600.00 £     15,600.00 £         16,400.00
Cash surplus/ Deficit £   118,800.00 £ 111,300.00 £   104,000.00 £ 94,500.00 £ 86,000.00 £     76,700.00 £   68,200.00 £   59,600.00 £  50,200.00 £     41,600.00 £   33,000.00 £     23,600.00

 

The positive cash balances implies that the Michelle’s business has sufficient cash surplus required to meet short term obligations as they fall due hence it cannot be declared insolvent (Cropper, 2014).

 

 

 

 

 

 

 

 

 

References

Bodie, Z., & Merton, R. (2000). Finance. Upper Saddle River, NJ: Prentice Hall.

Cropper, L. (2014). Accounting, London: MacDonald and Evans.

Dean, J. (2011). Accounting. Durham, NC: Eno River Press.

Drury, C. (2012). Management and cost accounting (3rd Ed.). London: Chapman & Hall.

 

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