Skip to main content

Cash flow forecasts - case study - cash flow management


Wholesale Phones Ltd

Three shareholders, Sandra, Sumira and Ranjit, have just set up a small company that buys mobile phones from Asia and the sells them to wholesalers in Europe. Marketing and selling is done using the Internet. When they started trading, Ranjit the Accountant, arranged an overdraft with the Bank for $100,000. They had also deposited $36,000 in cash in return for the initial share issue.

The early weeks were very hard, but the market was growing. Sales were very good, and all the owners' efforts were put into buying and selling. Credit control was ignored, and Ranjit let the work on the cash flow forecast slip.

The owners are in the boardroom when the receptionist interrupts them.

'Ranjit, phone the Bank Manager at once. Unless you talk to her, she will call our overdraft in.'

'What is she on about', said Sandra, 'does that mean I will have to cancel the order for my BMW?'

Ranjit went to his office. He had not really checked the cash position for two months.

He was a little worried. His records showed the following.

Opening bank balance - $12,468 credit


Rent: Office $3,000 per month. Both months paid.
Furniture: $1,000 per month. One month paid.
Cars: $1,000 per month. One month paid.
Rates, Insurance etc: $1,000 per month. Both months paid.
Tax: $500 per month. None paid.
Services: $250 per month. Both months paid.
Salaries and expenses: $9,500 per month. Both months paid.
Sundries: $1,000 per month. One month paid.


Period 1: $15,000 All paid for.
Period 2: $24,000 All paid for.
Period 3: $30,000 Half paid for.
Period 4: $40,000 No payments received.
Period 5: $86,000 No payments received.


Period 1: $8,000 Paid.
Period 2: $15,000 Paid.
Period 3: $15,000 Paid.
Period 4: $55,000 Paid.
Period 5: $45,000 Paid.

Was he right to be worried, and will Sandra get her car? He had set up an overdraft limit of $80,000 with the bank. Surely that was enough?

Hint: He has every right to be worried, very worried!