All sales are to customers within the UK and the sales manager predicts sales for 2020 to be 450,000 products. The sales are seasonal and the sales manager is optimistic that sales will grow at 2% per annum for the next five years. The selling price is expected to remain at £35 per item.

Cost of sales includes direct labour wages and raw materials and packaging. The swimsuits are distributed to central warehouses and then delivered using a postal delivery service to customers.

Estimated shipping and distribution costs in 2020 are £2 per unit. These costs are expected to inflate by 4% per annum.

Raw material prices are expected to increase 2% year on year.

Packaging costs are £1 per unit. Packaging costs are expected to increase by 1% year on year.

The fixed lease for the premises of £650,000 expires on 30th June 2021. A new 5 year lease has been agreed at a price of £700,000 p.a. The rent is paid quarterly in advance.

Utility costs to inflate by 5% p.a.

Wages to increase by 3% p.a. and salaries by 4% p.a.

All other overheads are expected to increase in-line with UK inflation of 3% p.a.

Corporation tax is charged at the rate of 20% on operating profits. The company pays tax for the 12 month period in 4 quarterly instalments paid on the 14th day of July, October, January and April for each 12 month reporting period to 31st December. For the year to 31st December 2020, two payments have already been made in July and October 2020 a further £157,125 corporation tax for the year to 31st December is due, payable in equal instalments in January and April 2021.

The business pays a 8% dividend based on the profit of the previous year with a minimum guaranteed distribution of £45,000 p.a. The dividend is paid in April each year.

There is a planned upgrade to the online sales system to start in September 2021, there will be an initial payment of £600,000 followed by three equal payments of £200,000 in the months October to December.

Depreciation costs will increase by 30% in 2021 and will continue to increase by 5% p.a. in following years.

The opening cash balance at the beginning of 2021 was £135,000.

Retained earnings were £560,000 at the beginning of 2020.

Information relevant to the preparation of the 12 month detailed 2021 Cash Forecast:

Sales are collected 25% in the current month and 74.5% the month after, the remaining 0.5% relate to uncollectable bad debts.

It is company policy to maintain finished goods stock at 25% of the following month’s requirement. The opening stock of finished goods is estimated at 4,500 units at the beginning of November 2020. Each unit requires 1.25 metres. of material at a present cost of £14 per metre. Raw material stocks are maintained at 10% of the following month’s requirements. Opening raw material stocks were 2,100 metres at the beginning of November 2020. Purchases are paid for 20% in the following month and 80% the month after.

All other costs are paid in the month they are incurred in.

Each unit takes 0.5 hours to complete and the company estimates idle time is running at 10%. Labour is currently paid £9 per hour in 2020.2

Ignore sales tax.

  1. Produce a DETAILED Cash Flow for JUST 2021 based on 2020’s Financial Statements and all of the information given above. You will need to use the 12 monthly information given above.

You will need to expand the overhead section by making reasonable assumptions as to what other costs you would expect to be reflected in a manufacturing business and ensure you have accurately included all of the information given to you in Note 1. Please make sure your individual category totals for Sales, Cost of Sales, Distribution, Overheads etc. do actually reconcile to those given in the Financial Statements.

  1. Clearly identify all assumptions used in your model as to how expenses or income have been inflated and translated and which costs you have treated as being fixed as opposed to variable costs.

Last Year’s Results – from the Financial Statements and Notes to the Accounts

Estimated Income Statement – 2020



£
Turnover
15,750,000
Raw materials 7,875,000
Wages 2,475,000
Packaging 450,000
Cost of sales
10,800,000
Gross Profit
4,950,000



Shipping & Distribution
900,000
Overheads
2,478,750
Operating Profit
1,571,250



Tax 314,250
Dividend Paid 100,560
Profit after tax and dividend
1,156,440



Salaried Staff Costs (excluding Directors)




Average number of Employees 14
Average Salary 30,000



Directors

Remuneration 450,000
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