Velvet Pop Ltd is a wholesale business. The budgeted income statements for each of the next three months are as follows: Jan Feb Mar £000 £000 £000 Sales revenue 45 50 60 Cost of goods sold 20 23 31 Salaries & wages 10 10 10 Electricity 5 5 4
Depreciation 3 3 3 Other overheads 2 2 2 Total expenses 40 43 50 Profit for the month 5 7 10 The business allows all of its customers one month's credit (namely, that cash from January sales will be received in February). Sales revenue during December totalled £40,000. • The inventories balance at 1 January will be £30,000. The business plans to maintain inventories at their existing level until the end of February, when they are to be increased by £10,000. And then inventories will remain at the higher level indefinitely. Inventories purchases are made on one month's credit. December purchases totalled £30,000. • Salaries & wages are paid in the month they are incurred. • Electricity expenses are paid at the end of each quarter. • Other overheads are paid every two months. • The business plans to buy and pay for a new delivery van in March. This will cost a total of £35,000, but an existing van will be traded in for £4,000 as part of the deal. • The opening cash balance at the beginning of January should be £7,000. Required: Prepare the following budgets of Velvet Pop Ltd for the three months ending 31 March: a). i) A materials inventories budget ii) A trade receivable budget iii) A trade payable budget iv) A cash budget b). Please comment on the key concern for Velvet Pop Ltd from the results in cash budget above. Can you provide some suggestions could overcome this problem, and state the 10 importance of budgeting for a business?