MarHan Shoes Maryam and Hanadi are planning to open a shop to sell female shoes in Abu Dhabi. The venue of the shop is decided to be a rented premises in Marina Mall. They wish to start their operations from 01 July2020 They approached the bank for a working capital loan and they were told that any borrowing would have to be supported by a detailed statement of cash receipts and payments. They were also told that it would be very helpful to the bank if borrowers would indicate the expected level of forecasted sales expected purchase and disbursements for operating expenses for the forthcoming third quarter of the financial year 2020. The company has decided to prepare various components of the operating and financial budget. You have been given the responsibility to prepare these components of the operating and financial budget for the third quarter of 2020 (July-September, 2020). The following information is available about the company's operations. The company predicts a sale price of AED 350 per unit Sales in units from July - September, 2020 are as follows: Month Sales (Units) July 250 August 300 September 400 All sales are on credit and are collected in the following ratio: 45 percent collected in the month of sale, • 30 percent collected in the month after sale. • 25 percent collected in the second month after sale.
Cost of purchases are as follows. Month Cost (AED) July 120,000 August 135,000 September 110.000 All purchases are on credit. 40% percent of a month's inventory purchases are paid in the month of purchases and 60% in the month after purchases. Operating expenses are budgeted per month as follows. Operating expenses Amount (AED) Insurance 500 Utilities 400 Salaries & wages 7,000 Rent 8000 Other expenses 5500.
The company plans to borrow AED 55,000 in the month of July with an interest of 1.5% of the borrowed amount per month starting from August. The loan is to be paid in full at the end of September, 2020.
a. The Company will have a cash balance of AED 33,000 on 01 July, 2020.
prepare a sale budget, cash collection schedule, cash disbursement for purchases and expenses schedule and cash budget.
b. Analyze the cash disbursement and purchase schedule and provide your judgement
c. Comment on your general findings (based on the cash collection schedule, cash disbursement and purchase schedule, and cash budget) and explain to Maryam and Hanadi the importance of preparing Budgets.