Rimu Bike Repairs: profit versus cash
Rimu Bike Repairs is a one-person workshop. The owner prepared a forecast showing a $4,800 profit for the next three months, but the bank balance is only $1,150 and the overdraft limit is $2,000. Opening cash is $1,150.
Forecast sales are $24,000. Of these, $14,400 are credit sales; customers pay 30 days after invoicing, and $2,400 of those invoices are due in month 3. Cash sales are collected immediately. Purchases are $10,800, with 40% paid in the month of purchase and 60% the following month; $3,600 of purchases relate to the last month. Wages are $5,400 paid evenly. Rent is $2,700 paid monthly. A loan repayment of $2,400 includes $450 interest. Equipment costing $3,800 is to be bought in month 2 for cash.
A regular customer asks for a $3,200 repair job on 60-day terms. The job needs $1,100 of parts that must be paid for on delivery; 20 labour hours are already paid for. The owner must decide whether to accept the job and whether to buy the equipment.
1. Explain why a forecast profit of $4,800 can occur while cash is tight. Use at least two specific items from the data.
Read the worked answer
Profit measures revenue earned minus expenses for the period; cash measures money in and out. Three causes here:
- Credit sales: $14,400 of sales are on credit and $2,400 is not due until month 3, so cash receipts are $12,000 from credit plus $9,600 cash sales = $21,600, not $24,000.
- Equipment: $3,800 is a capital purchase. It uses cash but is not a full expense in the profit forecast (only depreciation, if any, would be).
- Loan repayment: $2,400 cash leaves the business, but only $450 is interest expense; the rest reduces the loan principal.
- Purchase timing: $10,800 of purchases are paid partly next month; $2,160 of last-month purchases remains unpaid at period end, so cash payments are $8,640, while the profit forecast may match purchases to sales.
So profit can be positive while the bank balance falls.
2. Prepare a three-month cash budget summary and state whether the equipment should be bought in month 2.
Read the worked answer
Cash receipts:
- Cash sales $9,600
- Credit sales collected ($14,400 − $2,400) $12,000
- Total receipts $21,600
Cash payments:
- Purchases paid ($10,800 − $2,160 unpaid) $8,640
- Wages $5,400
- Rent $2,700
- Loan repayment $2,400
- Equipment $3,800
- Total payments $22,940
Net cash flow = $21,600 − $22,940 = −$1,340. Opening cash $1,150 → closing cash −$190.
The overdraft limit is $2,000, so the closing balance is within the limit by $1,810. But the buffer is thin.
If the $3,800 equipment is deferred, closing cash becomes $1,150 − $1,340 + $3,800 = $3,610. That is safer. The equipment should not be bought in month 2 unless it is essential for revenue that is already contracted. Better to lease, buy second-hand, or delay until the credit customers pay.
3. Recommend whether Rimu should accept the $3,200 job and buy the equipment. Include one accounting control.
Read the worked answer
The job has a contribution of $3,200 − $1,100 = $2,100 before any extra labour, so it is profitable. But cash timing is the issue: $1,100 of parts must be paid now, while $3,200 arrives in 60 days. If accepted, the cash low point is about −$1,290 (closing −$190 − $1,100), still inside the $2,000 overdraft, and the ending balance after payment is about $1,910. That is acceptable only if the customer is creditworthy and pays on time; a late payment would breach the overdraft.
Recommendation: accept the job only with a 50% deposit of $1,600, or a signed payment plan. The deposit covers the parts and preserves a cash buffer. Do not buy the $3,800 equipment yet; defer it, lease it, or buy a cheaper second-hand item until receivables are collected and the job is paid.
Control: prepare a weekly cash-flow forecast and compare actual receipts to it; invoice on completion and follow up at 30 days. Keep business cash separate from personal cash.