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5 Question Five Peter Blair has worked for some years as a sales representative, but has recently been made redundant. He intends to start up in business on his own account, using $15,000 which he currently has invested with a building society. Peter maintains a bank account showing a small credit balance, and he plans to approach his bank for the necessary additional finance. Peter asks you for advice and provides the following additional information. (a) Arrangements have been made to purchase non-current assets costing $8,000. These will be paid for at the end of September and are expected to have a five-year life, at the end of which they will possess a nil residual value. (b) Inventories costing $5,000 will be acquired on 28 September and subsequent monthly purchases will be at a level sufficient to replace forecast sales for the month. (c) Forecast monthly sales are $3,000 for October, $6,000 for November and December, and $10,500 from January 20X4 onwards. (d) Selling price is fixed at the cost of inventory plus 50%. (e) Two months' credit will be allowed to customers but only one month's credit will be received from suppliers of inventory. (f) Running expenses, including rent but excluding depreciation of non-current assets, are estimated at $1,600 per month. (9) Blair intends to make monthly cash drawings of $1,000. Required: (a) Prepare a cash budget for the six months to 31 March 2020 [14 marks] (b) Interpret the results of the above cash budget and identify a financial plan to meet the expected consequences [4 marks) (c) Briefly explain the importance of preparing a cash budget [6 marks] 6

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