Naledi’s Motors (NM) is a luxury car dealership. The company’s opening bank balance at the beginning of January 2019 is $250,000 overdrawn, and the bank has warned NM, that if they are to remain overdrawn by the end of April, then action will be taken to recover any money outstanding. This is likely to result in bankruptcy.

Actual and forecasted sales volumes are as follows:

Month	Oct (actual)	Nov (actual)	Dec (actual)	Jan (forecast)	Feb (forecast)	March (forecast)	April (forecast)
Units	25	27	29	30	38	34	35

The average selling price per car is $50,000 with customers required to make a 20% deposit when placing an order, the remaining balance being payable in one month, however at present customers are in fact taking a further 3 months to pay, i.e. January sales are settled in April.

The contribution on each car is 20% of the selling price; the cost of each car must be paid to the car manufacturer within 2 months of the sale.

The sales team comprises 6 members who are paid a basic annual salary of $36,000 paid evenly across the year. An additional commission of 2% of the selling price is paid in the month of sale to the person responsible. All other operating costs are fixed and total $40,000 per month (this includes depreciation of $5,000).

Additional cash outflows include an annual franchise payment of $100,000 in March, and a disputed tax bill of $250,000 must be settled in April.

Required:

(a) Prepare a cash budget for the period January through to April 2019, clearly detailing each item of income and expenditure for each month, together with the opening and closing cash balances, commenting on the company’s position

(b) Explain the motives for holding cash for a small company such as NM.

Answer rating: 100% (QA)

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