Simon intends to start his own business selling specialist wines. Some of his sales will be for cash from a shop that he intends to rent. He also plans to sell some wine on credit to local restaurants and hotels. The details of his business plan are as follows:
1. He will rent a shop for £14,000 per annum payable quarterly in advance. The landlord also requires a deposit of £5,000 to be paid when the rental starts in June.
2. He will invest £13,000 from his own savings and his father will loan him £7,000. His father will charge interest at a rate of 2.5% per annum payable annually after an interest free period of 6 months.
3. Simon will purchase and pay for £13,000 of wine in June. Thereafter, to maintain the same level of inventory, he will purchase wine to replace what is sold.
4. Suppliers will allow one month’s credit and credit customers will expect one month’s credit.
5. Sales levels are predicted to be:
Total sales Cash sales Credit sales
£ £ £
June 6,000 3,000 3,000
July 6,500 3,000 3,500
August 7,000 3,000 4,000
September 8,000 3,500 4,500
October 9,500 4,500 5,000
November 12,000 5,000 7,000
6. Wine will be sold at a gross profit margin of 20%.
7. Simon intends to withdraw £400 per month for his own use and will employ a part- time assistant whom he will pay £300 per month.
8. Simon will need to purchase and install shelving that will be delivered and paid for at the beginning of June at a cost of £2,900. He will also lease a van at a cost of £500 per month.
9. Other anticipated costs are:
£
June 600
July 280
August 500
September 700
October 670
November 560

REQUIRED:
a) Prepare a cash budget for Simon for his first 6 months’ trading to 30 November.[17 marks]
b) What size overdraft facility should Simon request from his bank?[2 marks]
c) Why a cash budget is required for Simon’s business?[6 marks]