Question 4 The Greenwood Furniture Company is a small firm specialising in the m

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Question 4 The Greenwood Furniture Company is a small firm specialising in the manufacture of customised bedroom furniture. All their sales are on advance orders and therefore can be forecasted quite accurately. January through June the sales and labour / materials forecasts are as follows: The collection schedule is as follows: Collected 1 month before sales 20% Collected in the month of sale 40% Collected in the month after sale 40% Expenses for labour and materials are paid for in the month following the month in which they were incurred. Other monthly expenses are as follows: Administration $15,000 Rent $ 12,000 Miscellaneous $ 8,000 Taxes of $80,000 are payable in March and June. a) Prepare a cash budget for Greenwood for February 2011 through April 2011. As of February 1, 2011 we assume that there is an opening cash balance of $5,000. (10 marks) b) Based on the cash budget will Greenwood have to borrow any funds to meet its cash outflow requirements for the February to April period? What recommendations, if any, would you make to Greenwood's management based on the cash budget? (10 marks)

Explanation / Answer

The below table shows the funds that are received from sales in each month. As these are advance sales, 20% of sales of January would have been received in December. Therfore in January only 80% of sales have been shown, ie 80% of 150,000 = 120,000.

b) Yes, Greenwood would have to borrow funds to meet their monthly requirements. The problem with their policies are that they receiver funds over a period of three months but they pay their expenses in the month in which they are incurred. My advice to the mangagement would be to have better payment terms with the suppliers so that they can make the payments over a longer period of time. Also, the payment collection period should be improved so as to minimize this deficit.

MONTH SALES LABOR/MATERIAL JANUARY            1,50,000                    1,00,000 FEBRUARY            1,50,000                    1,50,000 MARCH            2,50,000                    1,50,000 APRIL            3,00,000                    3,50,000 MAY            3,50,000                    1,50,000 JUNE            2,50,000                    1,50,000

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