Norton Company is an office supplies speciality store in Sydney. Recently, Daniel Davis, the manager of the store, has been concerned about cash flow shortages, which arose quite unexpectedly in the last three months of the past year. The store bank account went into overdraft and incurred interest charges. Davis believes that the main source of the cash flow difficulties is a lack of attention to outstanding customer accounts and the practice of purchasing office supplies in large quantities at irregular intervals

Actual sales for the last two months of 2014 and budgeted sales for 2015 follow (all sales are credit sales)

Experience has shown that of total sales, 50 per cent are collected in the month of sale, 20 per cent are collected in the following month, 20 per cent are collected two months after sale, and 10 per cent are uncollectible. In the budget year, new credit policies are expected to result in collections of 60 per cent in the month of sale, 20 per cent in the next month, 10 per cent are collected two months after sale and 10 per cent uncollectible. .

The cost of office supplies was $50,000 in December and is budgeted as $400,000 for the first half of the year ($250,000 to be purchased in March and $150,000 to be purchased in May). Half of suppliers’ accounts are paid in the month they are incurred and half in the following month. Monthly salaries of $75,000, selling and administrative expense of $40,000 and bank interest are paid in the month they are incurred. Bank overdraft as at 30 December 2014 was $200,000. The maximum credit limit of this overdraft facility is $500,000 and the applicable interest 18% per annum. The monthly interest on the overdraft is calculated on the overdraft balance at the beginning of the month.

You are required to prepare a report to the manager of Norton Company showing the following: