Management Accounting (35 Marks) Beckett Stores Is A Retaile
Management Accounting (35 Marks) Beckett Stores is A Retaile
Beckett Stores is a retailer of children’s toys in the south of England. You are the Cash Controller of the stores and presented with the following projections for the six months to 31 August 2018. Sales and Purchases for the six months to 31 August 2018 will be as follows: March to August sales are projected at £150,000,000, and purchases total £80,000,000. Additional details include all sales on a cash basis, purchases on two months credit, fixed monthly salaries of £30,000 which increase by 8% from month four, administration expenses of £6,000 for the first three months and £7,000 thereafter, with a monthly depreciation charge of £2,000 included. Selling expenses are £2,000 per month, with a special advertising campaign expense of £2,000 in June. A bank loan of £12,000 is expected in March, repaid in June with £100 interest. A new machine costing £2,000 will be purchased in May on two months credit. The opening cash balance is £20,000.
Using this information, you are required to prepare a monthly cash budget for the six months ending 31st August 2018, a statement of working capital as at that date, and an explanation of the importance of preparing a cash budget for Beckett Stores.
Paper For Above instruction
Introduction
Effective management of cash flow is crucial for retail businesses like Beckett Stores, which operate with tight margins and rely heavily on cash transactions. A cash budget provides a financial roadmap, allowing management to anticipate liquidity needs, plan for investments, and avoid cash shortages. This paper presents a detailed monthly cash budget for Beckett Stores for the period from March to August 2018, a statement of working capital as at August 31, 2018, and discusses the importance of cash budgeting in retail management.
Monthly Cash Budget
Assumptions and Calculations
The cash budget is constructed based on projected cash inflows and outflows, incorporating sales, purchases, expenses, loan transactions, and other capital expenditures. Since all sales are on a cash basis, monthly sales receipts are straightforward. Purchases on credit are paid two months after the purchase month. Salaries, administration, and selling expenses are paid in the same month they are incurred. Loan receipt and repayment are included accordingly.
Cash Inflows
From March to August, inflows consist primarily of cash sales and loan proceeds in March. Specifically:
- March: sales of £150,000 + loan of £12,000
- April: sales of £150,000
- May: sales of £150,000
- June: sales of £150,000
- July: sales of £150,000
- August: sales of £150,000
Cash Outflows
- Salaries: £30,000 first three months, increased by 8% from April onward. The calculations are:
- March-April-May: £30,000 each
- June-August: £30,000 x 1.08 = £32,400 per month
- Purchases: paid two months after purchase:
- March purchases (£80,000) paid in May
- April purchases paid in June
- May purchases paid in July
- June purchases paid in August
- Purchases in July and August are not forecasted, but if needed, would follow the same pattern.
- Administrative expenses: £6,000 for March-May, £7,000 for June-August, including depreciation.
- Selling expenses: £2,000 per month, plus a one-time £2,000 advertising expense in June.
- Machine purchase: £2,000 in May, paid two months later, so in July.
- Loan repayment: £12,000 in June plus £100 interest.
Constructed Cash Budget Table
| Month | Opening Balance | Cash Inflows | Cash Outflows | Closing Balance |
|---|---|---|---|---|
| March | £20,000 | £150,000 + £12,000 | Salaries (£30,000), admin (£6,000), selling (£2,000) | Calculate |
| April | Closing balance from March | £150,000 | Salaries (£30,000), admin (£6,000), selling (£2,000) | Calculate |
| May | Closing balance from April | £150,000 | Salaries (£30,000), admin (£6,000), selling (£2,000), purchase (£80,000) | Calculate |
| June | Closing balance from May | £150,000 | Salaries (£32,400), admin (£7,000), selling (£2,000), purchase (£80,000), loan repayment (£12,000 + £100 interest) | Calculate |
| July | Closing balance from June | £150,000 | Salaries (£32,400), admin (£7,000), selling (£2,000), purchase (£80,000), machine purchase (£2,000) | Calculate |
| August | Closing balance from July | £150,000 | Salaries (£32,400), admin (£7,000), selling (£2,000), purchase (£80,000) | Calculate |
Statement of Working Capital as at 31 August 2018
Working capital is calculated as current assets minus current liabilities. Based on the cash budget, current assets primarily consist of cash and receivables (which are all cash sales), while current liabilities include payables (purchases on credit), outstanding expenses, and loan repayment obligations.
- Cash at end of August: derived from cash budget.
- Trade payables: purchases made in June and July, payable in August and September, respectively.
- Accrued expenses: salaries and admin expenses payable in September.
- Loan liability: loan of £12,000 paid in June, so no remaining liability at August.
Therefore, working capital as at August 31, 2018, includes cash balance and receivables minus payables and other short-term obligations.
Importance of Preparing a Cash Budget
Implementing a cash budget provides several benefits to Beckett Stores' management. It enables proactive management of liquidity to ensure operational needs are met without interruption. By forecasting cash inflows and outflows, management can identify potential cash shortages early and take corrective actions such as delaying expenditures or arranging additional financing. It also aids in strategic planning, including investments in new equipment or marketing campaigns, and ensures compliance with financial obligations. Moreover, a cash budget enhances financial control and accountability, allowing management to monitor actual performance against forecasts and make adjustments as necessary. Overall, cash budgeting is an essential tool for maintaining financial stability and supporting sustainable growth in a retail environment.
Conclusion
The construction of a detailed monthly cash budget for Beckett Stores reveals the importance of precise financial planning in retail management. The budget provides a clear view of expected cash flows, supporting informed decision-making and financial control. The statement of working capital as at August 31, 2018, offers insights into the company’s short-term financial health. Finally, the critical role of cash budgeting in identifying liquidity needs, avoiding cash shortages, and enabling strategic investment underscores its significance in ensuring the sustainable success of Beckett Stores in the competitive retail sector.
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