F2 CASH BUDGETS

 W1 Of the $300 total January sales, $30 pay cash immediately therefore $270 are credit sales (no cash in for at least one month) of this $270, 60% will be received one

month later, ie in February and 38% two months later, ie in March. Remember the 2% irrecoverable debt will never be cash flow.

So now the company can see that while the sales revenues figures may be healthythere is a delay between making the sale and receiving the cash. Why does this matter? It matters if the company needs to pay cash out in order to keep trading. For example, expenses such as labour, materials and overheads may have to be paid out before the cash from the sales arrives. This can lead to serious liquidity issues if not managed properly.

If the metal box company has a labour cost equal to 20% of the sales value a materials cost equal to 25% of the sales value and an overhead cost equal to 15% of the sales value, then the functional budget would be as follows:

The company can see that there is a 40% gross profit margin, which is considered good for the metal box industry but a healthy profit does not necessarily mean a healthy cash flow.

Consider that labour is paid weekly one week in arrears and that there are four weeks in both January and February and five weeks in March. The cash outflow for labour would be:

The material supplier will not allow the metal box company any credit as because it is a newly formed company, it has no track record of paying its debts. The supplier of materials is also aware that new companies often fail and go out of business thus creating irrecoverable debt. Therefore, the supplier is insisting on cash at time of delivery for all materials purchased. However, the metal box company has to buy the materials before they can be made into boxes (therefore the material purchase budget differs from the material usage budget). Half of the materials required for production must be purchased and paid for in the month prior to sale the other 50% can be purchased and paid for in the month that the metal boxes are manufactured and sold. Thus, the cash outflow for material purchases would be: