Managerial

The management of a local organization is considering starting an income generating project to

improve its financial position and improve the quality of services it is rendering to the
community. The Board of Directors requested your help in preparing an operating budget
including a cash budget for the six months ending 31/12/22020. The Board of Directors has
promised to secure $100,000 for this project if it proves to be profitable.

You gathered the following information:

 $100,000 is expected to be secured by the Board of Directors and the project will start on
1/7/2020.
 A building will be rented at an annual rent fee of $24,000. It is expected that the rent of
the first three months will be paid in advance.
 It is expected that utilities will be $5,000 per quarter payable at the beginning of the
following quarter.
 Equipment will be purchased for $79,200. 50% will be paid at the time of purchase i.e. in
July 2020 and 50% in October 2020. The estimated useful life of this equipment is 4
years.
 Furniture will be purchased for $4,080 in July 2020. The estimated useful life of this
equipment is 2 years.
 A vehicle will be purchased for $8,160 in July 2020. Annual insurance is $1,500 payable
in July 2020. The estimated useful life of the vehicle is 4 years.
 It is estimated that raw materials usage will average $25,000 monthly. It is also estimated
that purchases of raw materials will be $50,000 in July 2020, $60,000 in September 2020,
and $60,000 in November 2020.
 It is expected that the payment of supplies will be made in the month following the
purchase.
 Salaries are expected to be $2,000/month for the first quarter and $3,000 per month for
the second quarter.
 Other operating expenses are estimated at $2,500 per month.
 Market analysis showed the following sales estimates. Sales will be on credit with
collections after 2 months of sales.

July 16 Aug 16 Sept 16 Oct 16 Nov 16 Dec 16

Estimated Sales in $ 0 20,000 30,000 50,000 100,000 100,000

Required: Prepare in good form

a. A profit and loss budget for the 6 months ending 31/12/2020.
b. A balance sheet budget as at 31/12/2020
c. A cash flow budget for the 6 months ending 31/12/2020.
d. As a Board of Director Member would you approve to fund the project. Why?

raw materials
consumptions $150,000.00
utilites for 2 months $10,000.00
rent 12000 ( 24000/2)
depreciation
furniture 1020 , 170 per month
equipment 9900 , 1650 per month
vehicle $1,020.00
salaries 15000 6000 + 9000
insurance $750.00
operating expenses( others ) 15000 ,2500*6
$85,310.00
sales $300,000.00
total $300,000.00

A profit and loss budget for the 6 months ending 31/12/2020.

liabilites

items amounts

secured funds from

the board $100,000.00

acc. Depreciation $11,940.00

utilities payable $5,000.00

rent payable $6,000.00

used cash $153,940.00

profit ( net) $85,310.00

 Assets  

equipments $79,200.00
vehicle $8,160.00
furniture $4,080.00

20000 60 ,000 < 5000

raw materials stock consumptions and on account
prepaid insurance $750.00
A/R $20,000.00
Total $362,190.00

A balance sheet budget as at 31/12/2020

 Operations    
Cash receipts from Inflow  
  Collected from Customers 50,000
  Other Operations  

Outflows Rent paid

6,000
  Utilities 5,000
  Insurance paid for vehicle 1,500
  Payments for suppliers 170,000
  Salaries 15,000
  Other expenses 15,000
Net Cash Flow from
  (162,500)
Operations
Investing Activities    
Out flows    
  Purchase of equipment 79,200
  Purchase of furniture 4,080
  Purchase of vehicle 8,160
     
Net cash flow investing-no
  91,440
inflows
     
Net Cash Flow from
  91,440
Investing Activities
Financing Activities Inflows  
Cash raised from the board
  100,000
of directors
     
Net Cash Flow from
  100,000
Financing Activities
A cash flow budget for the 6 months ending 31/12/2020

4. As a Board of Director Member would you approve to fund the project. Why?

In order to answer this question, we need to calculate the profit ratio. It is a key
indicator of the financial health of an organization. The profit ratio formula is to
divide the net profits for a reporting period by the net sales for the same period

Net profit ÷ Net sales = Profit ratio

Profit ratio = 85310÷30,000= 28% so yes, I would approve to fund the project.