Practice questions:

Using the information given in Question , imagine that Philip has negotiated a bank loan of £5,000 at 12% per annum which he receives in January. He has to pay the interest on at the end of each quarter. In addition, he wishes to draw £500 per month from the business for his personal use. Construct a cash flow forecast for Philip Trigg for the 6-month period January to June. Explain what action Philip might take to resolve any cash deficit that occurs during the period.

Question
Philip Trigg has negotiated with two manufacturers of electric circuit boards to carry out assembly work for them as a subcontractor. He anticipates assembling the following numbers of assembly boards for each manufacturer during 1998:

Firm A has agreed to pay £6.60 for each board assembled and Firm B £6.50. Firm A will pay 2 months after the work has been done, but Firm B will pay 1 month after the work has been done. Philip anticipates the following expenses:

•Rent of workshop                         £ 16,000 per annum, payable at the beginning of each quarter

•Lighting and heating                    £ 120 per month. payable 1 month in arrears

•Telephone                                    £ 50 per quarter. payable at the end of each quarter

•Packaging                                    10% of sales, payable in the month following the month in which the sales occur

•Miscellaneous expenses               £ 25 each month

•Tools and equipment                    £ 12,500 in January. £ 1,000 in February and £ 500 in March

Draw up a cash flow forecast for Philip Trigg for the 6-month period January to June and calculate the amount of capital he needs to invest in the business to prevent a cash deficit in any month.