CON-C-10-1-01

Agbero Nigeria Limited: Preparation of a Cash Budget

It was a hot humid day in April, 2010 but Mrs. Lizzy Amoo, the managing director of Agbero
Nigeria Limited – a small road haulage company based in Ogbomoso, Oyo state of Nigeria – felt
some discomfort that had nothing to do with the weather. She had just finished a meeting with
her bankers and was not particularly pleased with the outcome. She requested a one year loan
facility worth N 2.3 million from her bank to acquire the company’s fourth tractor-trailer – a
requirement by its major client, Essential Commodities Plc. The tractor would give the Company
leverage to continue doing business with its client. However, the bank made known its
requirements to grant the loan and one of which was a one-year cash budget. She had no idea of
how a cash budget should be constructed. Agbero Nigeria Limited began operations four years
earlier in memory of the late father-in-law of Mrs Amoo, a man she adored and respected
greatly. The business had been operating based on the knowledge she garnered by observing him
run a successful haulage enterprise in his lifetime.

Company Background
The company was a player in the road haulage and logistics industry and had three units of MAN
DIESEL tractor-trailers – one fairly old and two newer ones – with which it transported goods
for its clients from their production point to various parts of the country. The personnel involved
in the running of the business included Mrs. Lizzy Amoo (the Owner/Manager); Mr. John
Adeleke (an assistant/foreman to her who acted as a link between her and the drivers and ensured
the smooth running of the logistics department); and the truck drivers and their ‘cabin boys’ who

This case was prepared by Akintola Owolabi as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation.

Copyright © Lagos Business School, 2011.

No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise
– without the written permission of Lagos Business School.
Agbero Nigeria Limited: Preparation of a Cash Budget [CON-C-10-1-01]

ssisted them. The company had a small office in Ogbomoso town, Oyo state, which served as an
administrative point from where they scheduled their engagements.

Industry
The road haulage business was a thriving business in Nigeria as it was the major means by which
goods were transported by manufacturers all over the country to the various points of demand.
Ever since the railway system became defunct several years back, producers of various goods
had come to rely on the road haulage system consisting of tractor-trailers and trucks of various
sizes, pick-up vans, buses, etc. as their major medium of distribution.. As in most parts of the
world, air transport was expensive and would only increase significantly the eventual landing
cost of the goods. Transportation through the waterways was not effective either as not every
town and city was accessible by water. This made the road transport system the major choice of
most manufacturers.

The types of products transported varied widely, from household items like detergents and
toiletries, to electrical gadgets like refrigerators and stereo systems, to building materials like
cement and iron rods, and they even included food items like biscuits, flour, cooking oil, raw
vegetables and cattle for the meat market. Each part of the country had a predilection for
producing different items and relied on the road haulage system for distributing its products to
other parts and also bringing in its needed items. The eastern part of the country, for instance,
was known for its electrical gadgets, clothes, leather bags and shoes; the north supplied most of
the country’s cattle for beef as well as beans, potatoes, fruits and vegetables like cabbage,
onions, tomatoes, pepper, water melon and carrots; while the west was known for the production
of building materials like cement and iron rods, and household items like sugar, flour, detergents,
various drinks, biscuits etc.

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Company Operations
Basically, the operations of Agbero Nigeria Limited involved loading the tractor-trailers at the
clients’ warehouses in Lagos and travelling to Abuja, Kaduna, Kano, Maiduguri, or Sokoto, in
the north, where the goods were dropped at the clients’ major distribution points. The return
voyage generated little or no income as it depended significantly on the honesty of the driver in
declaring such. A 10% gross haulage income per trip would be a fair estimate for this and it
attracted immediate cash receipt upon the voyage return.

Ogbomoso – Agbero’s headquarters – was strategically located as an anchor point between

Lagos and Northern Nigeria such that any vehicle travelling from Lagos to the northern part of
the country and vice versa would have to pass through it. This was a major advantage that the
haulage company’s owner/manager and foreman capitalized on as it afforded them the
opportunity to perform needed repairs and carry out routine servicing on the trucks, pay workers’
salary and attend to other issues pertaining to the company’s operation without the trucks and
their drivers making extra trips to Ogbomoso. Fueling of the vehicles was done at designated
filling stations depending on the fuel level.

Essential Commodities Plc

Essential Commodities Plc, like other production enterprises Agbero offered its haulage services
to, was located in Lagos, in the Western part of Nigeria. The company’s line of business was in
the production of essential goods such as detergent, bathing and washing soaps, hair and body
creams, powder, toothpaste and baby wipes.

While some manufacturers had their own trucks for management of logistics and distribution of
their products, others like Essential Commodities outsourced this function to road haulage

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companies like Agbero Nigeria Limited. The contract varied among companies and so did the
market, especially for perishable food items. However, for companies like Essential
Commodities Plc., there was really no major seasonal variability in their production due to a
fairly constant demand profile throughout the year for the type of goods produced. Statutorily,
Essential Commodities Plc deducted withholding tax at 5% of gross haulage income during the
month.

Cash Budget preparation

Mrs. Amoo, a graduate of humanities, had no prior training in accounting/finance or related
subjects and therefore, did not know the basics of preparing a cash budget. She, however,
remembered that her son Olabode, who was running a Master’s program in Business
Administration in a London-based business school, was on vacation and had arrived in
Ogbomoso the previous day. She decided let him in on the current issue and he agreed to help
his mum.

In preparing the cash budget, Olabode went through the company’s past records of accounts and
transactions, asked the relevant questions pertaining to the company’s operations, and came up
with the following estimates for 12 months ending 30 April, 2011:

Revenues
The gross income from haulage was estimated using the assumption that each of the three trucks
currently working would, on the onward journey alone, carry 35 tonnes of goods per trip.
GA 127 XYZ was older and GA 357 XYZ and GA 468 XYZ were newer. The new truck, when
acquired, was expected to have the same profile as GA 468 XYZ. Exhibit 1 shows the average
number of trips per vehicle to different destinations in a month. Exhibit 2 shows the rate per
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tonne. Using this information, Olabode made a cash revenue estimate for 9 months: May to July
2010; September to November 2010; and January to March 2011. He accounted for possible
hazards inherent in road haulage system by reducing by a factor of 1/3 relevant income and
expenses in August and December 2010 and in April 2011. He also factored in returns by the
drivers for return trips as other sources of cash income.

Expenses
Fuel consumption per return trip to different destinations is shown in Exhibit 2. The total amount
spent by the company per month on fuel was calculated using a going rate of N 110 per litre.
From experience, Olabode was told, replacing an average of two tyres per truck per month had
been shown to be beneficial. A good quality tractor-trailer tyre cost about N 50,000. Other
relevant information incurred about monthly expenses included: vehicle service costs of about
N 15,000 per truck per trip; road expense allowance averaging N 10,000 per truck per trip; and
workers’ wages and salaries averaging about N 160,000 per month.

The contractee deducted 7.5% of gross income per trip at the point of payment, and this was
within the month of haulage. The actual figure of this deduction from January to April 2010 was
N 766,333. However, the total deduction for the year was refunded in April following the year of
deduction. The contractee year end was 31 December. Mrs. Amoo hoped that the bank would
grant the requested loan at the beginning of May, 2010 but knew this would only cover 70% of
the total cost of the tractor-trailer. An articulated truck of the said capacity consisted of a tractor
head that pulled a semi-trailer (loaded with the goods). The semi-trailer cost N 1.0 million and
Mrs. Amoo had personally financed its purchase before requesting for the tractor to be financed
by the bank. The tractor head – a MAN DIESEL model – was estimated to cost about
N1.8million; two brand new tyres were needed at the front wheel, estimated at N 0.1million;
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tarpaulin, registration, vehicle particulars and other miscellaneous expenses needed to make the
tractor-trailer fully functional were estimated at N 0.1million. This came up to a total cost of
N 3.0million before insurance. However, with an insurance premium of 10% per annum, another
N 0.3million expense was estimated. It was hoped the bank loan being sought would cover the
remaining N2.3million besides the semi-trailer. The new truck was expected to become
operational about two months after the approval of the bank loan.

Bank Loan

An interest rate of 22.5% per annum was anticipated on the bank loan as it was the going rate,
but a moratorium of 2 months on the principal but not on the interest was sought. A processing
and management fee of 4% flat was provided for and the principal repayment was based on 10
equal monthly installments.

Company Finances
There was an outstanding loan of N 0.6million due to a Cooperative Society. The repayment plan
was included in the cash budget. A principal repayment of N 0.1million per month plus a
monthly interest on the outstanding balance at 24% per annum was effected. In the worst
scenario, four months after this repayment, a new loan of N1.0 million would be taken from the
society in February, 2011.

The cash balance at the end of April 2010 was N 0.1million.

A possible template for preparing a cash budget is provided in Exhibit 3.

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Preparatory Questions

1.
1.1. What are the requirements for being granted a loan by a bank?
1.2. What else could a cash budget be used for apart from a condition by banks for
granting loan?
1.3. What are the risks involved in this business? How could they be eliminated?
1.4. What was the contractee deduction of 7.5% meant for? How else could this be done?
2.
2.1. Prepare the cash budget using the (attached spreadsheet (Exhibit 3) as a guide)
2.2. If you are the bank manager, on the basis of the cash budget above, will you or will
you not give the loan? Why, or why not?

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Exhibit 1
Agbero Nig. Ltd
Schedule of Number of Trips per Month
Destination Abuja Kaduna Kano Maiduguri Sokoto
Vehicle
GA 127 XYZ 2 1 1
GA 357 XYZ 1 1 2
GA 468 XYZ 1 2 1
New Truck 1 2 1

Exhibit 2
Agbero Nig. Ltd
Schedule of Rates and Fuel Consumption
Destination Abuja Kaduna Kano Maiduguri Sokoto
Rate
(Naira/Tonne) 3915 3690 5580 9540 5400
Fuel
800 900 1,200 1,600 1,000
(Litres/Return Trip)

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Exhibit 3

AGBERO NIG. LTD

CASH BUDGET FOR THE YEAR ENDED APRIL 30, 2011
Figures in N ’000
2010 2011

MONTHS May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Total
RECEIPTS
Income:
GA 127 XYZ
GA 357 XYZ
GA 468 XYZ
New Truck
Sub-Total
Returns by
Driver
Deposit
Refunded.
Bank Loan
Coop Society
Total Receipt
PAYMENTS
Fuel
Tyres
Service
Road
Expenses

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MONTHS May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Total
Salaries and
Wages
7.5% Deposit
New Truck:

Cost

Tyres
Registration,
Tarpaulin, etc
Insurance
Bank Loan:
Mgt. and
processing fee
Interest
Principal
Coop Society
5% W/Tax
Total Payment
Excess/(Deficit)
Bal. b/f
Bal. c/f

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