Please discuss the reasons for the significant deterioration

Please discuss the reasons for the significant deterioration of the cash balance in the cash budget above (Document 4), given the much smaller total loss recorded in the budgeted income statement. (325-375 words).

Document 4 Cash budget Newtron Technologies Ltd\'s Finance Department has prepared the following cash budget and budgeted income statement together with some balances extracted from the budgeted statement of financial position for the final 6 months of 2018 The Chairman of the Board has expressed surprise and dismay that the cash balance is expected to deteriorate by nearly £2,000,000 over a period when the total loss is expected to be less than £1.500,000 Cash budget July August September October November December Opening balance (250,000) (487,937) (895,422) (1,344,350) (1,823,601) (2,104,989) RECEIPTS Cash sales Credit sales Total receipts PAYMENTS: Cash purchases (586,818) (629,604) (684,468) (726,206) (698,490) (664,333) Credit purchases (579,495) (563,806) (580,708) (605,511) 615,599) (566,798) Operating expenses (144,800) (154,936) (165,782) 177,386) (189,803) (203,089) Fixed overheads (155,800) (155,800 (155,800) (155,800) (155,800) (155,800) Production labour (789,544) (824,645) (869,479) (932,324) (912,413) (809,967) Administration labour Total payments: (2,856,637) (2,946,976) (3,092,967) (3,253,060) (3,247,612) (3,095,760) Net cash flow Balance c/f 623,700 643,191 662,229 706,038 732,262 609,608 1,995,000 1,896,300 1,981,809 2,067,771 2,233,962 2,347,738 2,618,700 2,539,491 2,644,038 2,773,809 2,966,2242,957,346 (600,180) (618,185) (636,731) (655,833) (675,508) (695,773) (237,937) (407,485) (448,928) (479,251) (281,388) (138,414) (487,937) (895,422) (1,344,350) (1,823,601) (2,104,989) (2,243,402) Budgeted income statement July August September October November December Sales Cost of sales Gross profit 2,520,000 2,625,000 2,730,000 2,940,000 3,080,000 2,590,000 1,836,000) (1,912.500) (1,989.000) (2.142,000 684,000 712,500 741,000 798,000 836,000 703,000 Operating expenses (154,936) (165,782) (177,386) (189,803) (203,089) (217,306) Fixed overheads (156,645) (156,645) (156,645) (156,645) (156,645) (156,645) Administration costs (600,180) (618,185 Total expenses 08) (695,773 (911,761) (940,612) (970,762) (1,002,281) (1,035,242) (1,069,724) 636.731 655,833) (675,5 Operating profit/(loss (227,761) (228.112 (229.762 (204,281) (199,242) (366.724

Solution

Reason of deteriorating Cash Flow:

1. Though there are one month credit for both Accounts Receivable and Accounts Payabale, amount locked in accoutns receivable is much more than payable and hence impact on cash balance.

2. FG Turnover (Finished Stock/Sale) has also been in increasing trend. Means FInished goods is being kept in stock more while comparing with Sales, having negative impact on Cash Balance.

3. RM Stock ratio to Cost of Goods sold has also been increasing.