(a) Cash budget Jan Feb March April

Rs'000 Rs'000 Rs'000 Rs.

000
Receipts

Fee on sale (W1) 54 63 99 144

Receipt on sale of vehicles 20
54 63 99 164
Payments
Salaries 26.25 26.25 26.25 26.25
Bonus (W2) 6.3 12.6
Variable expenses (W3) 9 13.5 22.5 27
Fixed overheads 4.3 4.3 4.3 4.3
Interest on loan 3.0
Tax liability 95.80
39.55 44.05 62.35 165.95
Net cash flow 14.45 18.95 36.65 (1.95)
Balance b/fwd (40.00) (25.55) (6.6) 30.05
Balance c/fwd (25.55) (6.6) 30.05 28.10

Working 1 Jan Feb March April

Receipts

Unit sales 10 15 25 30

Fee at 3% $180,000 numbers sold 54 81 135 162

Received
1% in month of sale 18 27 45 54
2% in following month
(January receipt relates to December sale) 36 36 54 90
54 63 99 144
 Working 2
Jan Feb March April
Receipts
Unit sales 10 15 25 30
Rs'000 Rs'000 Rs'000 Rs'000
Bonus based on numbers sold over 20 0 0

$140 9 numbers sold over 20 0 0 6.3 12.6

Working 3
Jan Feb March April
Receipts
Unit sales 10 15 25 30
Rs. Rs. Rs. Rs.
Variable overheads at 0.5% $180,000
numbers sold 9 13.5 22.5 27

(b) Factors to consider when investing any cash surplus

The cash budget for Thorne Co shows an increase in sales over the period, which suggests higher sales as
the spring approaches. However, the payment of tax in April meant that a trend of increasing net cash flows
was temporarily reversed.
Thorne needs to consider the following when investing any surpluses:
(i) Short-term investments with no capital risk as these may be called upon at any time. Short-term
investments include bank deposit accounts, certificates of deposit, term bills and gilts, which are
short-dated.
In choosing between these, Thorne Co will consider the size of the surplus, the length of time it is
available, the yield offered and the risk associated with each instrument.
(ii) On an annual basis, look at any surpluses and invest these in longer-term higher yield assets. The
company will most probably call on these at some stage to fund expansion but needs to pick the
investments carefully.
The investment of cash balances is part of the treasury function of a company. It is unlikely that Thorne Co is
of a size to sustain a full time treasury activity but nonetheless there is a definite benefit in closely managing
any surpluses.
(c) Advantages and disadvantages of using overdraft finance to fund cash shortages
Thorne Co has budgeted deficits in two of the months in the forecast. These are short term in nature so it is
unlikely that a long-term loan will be required to fund these.
Typically, temporary deficits are funded by an overdraft granted by the company's bank where interest is
charged on the overdrawn amount at a rate over base.
Advantages of overdraft finance include its flexibility and that interest is only due on the actual overdrawn
amount. The rate of interest is flexible as it is variable and linked to a base rate and so can go down as
well as up.
Disadvantages of overdraft finance include the risk of an interest rate increase as the rate is not fixed. Also,
the overdraft is repayable on demand. Banks usually ask for some collateral when lending such as a fixed or
floating charge on the company's assets.