Page 134 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 8: Cash Planning

required would cost ` 11,000. He would need to rent a small place for ` 1,200 per month for Notes
production. He proposes to use his residence as office for sales activity.
Bhatt proposes to introduce the product in Chennai city only. His sales projections are as
follows:
January 60
February 40

March 110
April 140
May 220
June 180

He is not interested in pushing sales beyond 220 units per month as he cannot cope with
the production. He has budgeted ` 20,000 for sales promotion, which will be spent mostly
for demonstration in leading department stores in the city. The promotion budget is
scheduled as follows:
`

January 7,000
February 7,000
March 3,000
April 3,000

This selling price per units will be ` 280 and the dealers will be given 15 percent trade
discount. He calculates that about 50 unit will be needed for “demonstration and display”
in the leading sores at his cost. Although the sales to dealers will be made on one month’s
credit, he knows that the actual collections will be realized in about 4 week’s time. He
rules out cash sales.
Assembling is one of the activities in the production process. Components and materials,
which will be purchased from outside parties strictly on 30 days credit, will cost ` 160 per
unit. Wages per month will be `6000. The production capacity per month will be 220 units.
Wages will be paid weekly. Overhead expenses are estimated at ` 2800 per month. Materials
and components need to be ordered at least one month in advance. There will be inventory
of finished goods or goods in process as the production will be strictly against firm orders.
Bhatt proposes to employ a full-time production, sales supervisor for ` 880 per month.
Mr Bhatt wants to know how much finance will be needed for his first six months of
operation and when, so that he may plan accordingly.
Questions
1. Discuss the nature of the financial problem involved.
2. Prepare the monthly cash budget for the first six months period of the proposed
venture.
3. How can the above-mentioned problem be sorted out?

Source: Sudhindra Bhat, Financial Management – Principles and Practice, Excel Books

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