Finance

The Victoria Nursery, which provides facilities for pre-school children on a commercial basis, is preparing its cash budget for next year. A profile of the estimated revenues and expenses for the first four months of the year is as follows:

Jan Feb Mar Apr
£ £ £ £
Revenues:
Fees due for payment 58,000 60,000 66,000 59,000
Costs:
Wages and salaries 11,000 11,000 12,000 12,000
Purchase of equipment 28,000 22,000
Payment of taxation 8,000
Purchases of consumables 2,000 2,500 2,200 1,400
Rent and rates 3,000 3,000
Sundry overheads 7,000 8,000 8,000 8,000
Telephone 1,200 1,400
Insurance 2,800
Building renovation 12,000 16,000 20,000 25,000

The following additional information is available:

(1) At the end of the current year, it is estimated that the nursery’s bank account will be overdrawn by £4,000.
(2) In addition to receipts from fees, the nursery will receive a loan of £5,000 from one of its owners in April, and the sale of unwanted toys and games will raise £500 in February.
(3) At the end of the current year, it is anticipated that £48,000 in unpaid fees will be outstanding: 40% of this will be received in January, 40% in February, and 18% in March, with the balance being bad debts. The pattern of fee receipts next year is expected to be 20% in the month due, 50% received in the month after they are due, 28% received two months after they are due, with the balance being bad debts.
(4) The nursery’s creditors at the end of this year are estimated at £12,000, all of which amount will be paid during January next year.
(5) Purchases of consumables and of equipment will be paid for in the month following purchase. Building renovations will be paid for 70% in the month due, and 30% in the month following.
(6) With the exception of item 5 above, all costs will be paid in the month incurred. Sundry overheads includes £1,000 per month depreciation.

REQUIRED

(a) Prepare the Victoria Nursery’s cash budget for each of the first four months of next year.

(b) In response to the cash flow position revealed by the budget in (a), one of the owners has suggested that fees should be increased by 10% from 1st January next year:

(i) Assuming that all other factors remain as stated, estimate the effect on the nursery’s cash balances in each month of the proposed fee increase.

(ii) Assess the likely effectiveness of the owner’s proposal and suggest other means by which the budgeted cash-flow position could be improved.

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