Duzzle Dorff is in the process of starting a small business by making educational wooden puzzles for kids. He asked you to assist him with some financial planning for his new venture. Duzzle plans to sell his puzzles for R100 per unit and his normal production capacity will be 750 units per month. His estimated monthly cost breakdown based on the normal production capacity is:

Product                                Amounts used per unit                    Price
Material – Glue                                 200 ml                          R20.00 per liter
Material – Paint                                 400 ml                          R15.00 per liter
Material – Plywood                          800 mm                         R10.00 per meter
Labour                                               2h                                   R8.00 per hour
Overhead – Variable                          2h                                  R3.00 per hour
Overhead – Fixed                              2h                                  R5.35 per hour

Additional Costs
Sales Commission                                               10% of sales
Sales and Administration cost – Fixed                      R18 975

Duzzle also calculated the break-even point as 540 units.

Duzzle is concerned that he will need a bank overdraft to finance his working capital requirements during the start-up of his business and supplied you with the following notes on factors most likely to determine his business’ cash flow:

1. Production and sales volumes for his first four months of business:
Jun 2021:         50% of normal production capacity
Jul 2021:          Break-even units
Aug 2021:         650 units
Sept 2021:       100% of normal production capacity

He estimates that only 25% of sales will be on a cash basis since all customers will be wholesalers. Seventy-five percent of his proposed customers indicated that they would like to utilise a one month credit line. Bad debts, if any, would be negligible.

2. Material purchases
Glue will be purchased in the month prior to required use. His suppliers granted him one month credit for payments. Duzzle will utilise this credit to facilitate his cash flow.

Paint is in short supply and therefore Duzzle plans to buy his entire paint requirement for the first four months in June. Supply only takes place on a cash-order basis.

Plywood will be a stocked item with a minimum of 300 meters in stock at all times. Due to the supplier’s delivery charges being high, Plywood would be bought on a two-month cycle: requirements for June and July would therefore be acquired at the beginning of June and for August and September acquired at the beginning of August.

3. All other costs are paid immediately when incurred, except for Sales Commission which is paid one month later.

4. A refundable rental deposit equal to one month’s rent of R2 000 is payable at the beginning of June 2021.

5. Production equipment: wood-working and packing machines were ordered already and will be delivered and installed at the beginning of June. The cost of the equipment amounts to R65 000 of which R10 000 was payable when ordered. The balance is due when the equipment is delivered. An installation cost of R5 000 is payable when the equipment is delivered and installed.

6. Duzzle has R140 000 capital (cash) that he will provide the entity with at the beginning of June 2021. This (as well as the R10 000 deposit for production equipment) will be regarded as a personal loan to the company, earning interest of 12% per annum, payable to Duzzle on a monthly basis (from June 2021 onwards). Capital will be paid back to Duzzle from excess cash available in the company’s current account.

7. A current account will be opened in the entity’s name to operate from. Duzzle decided that a minimum balance of R50 000 should be built up and maintained in this account before any capital payments towards his personal loan could be made.

Required:

Prepare a cash budget for Duzzle Dorff for the period June – September 2021, broken down per month.

	June	July	August	September
Units sold
Cash receipts
Cash received from debtors
Cash sales
Total cash receipts
Cash payments
Payment to Creditors
Labour costs
Overhead cost - Variable
Overhead cost - Fixed
Sales & Admin - Variable commision
Sales & Admin - Fixed
Rent deposit
Production equipment
Installation costs
Interest paid (nr 3)
Total cash payments
Net cash flow
Opening balance
Closing balance
Payment to Creditors	June	July	August	September
Creditors for Glue
Creditors / Cash from Paint
Creditors / Cash from Plywood
Schedule for Purchases of Glue	June	July	August	September
(Creditors for Glue)
Production units
Used per unit
Total used (ml)
Total used (l)
Price per litre
Purchases
Schedule for Purchases of Paint	June	July	August	September	TOTAL
(Creditors / Cash for Paint)
Production units
Used per unit
Total used (ml)
Total used (l)
Price per litre
Purchases
Schedule for Purchases of Plywood	June	July	August	September
(Creditors / Cash for Plywood)
Production units
Used per unit
Total used (minimum per mm)
Total used (minimum per m)
Inventory (minimum per m)
Inventory (minimum perm)
Price per meter
Purchases
Payments