Professional Documents
Culture Documents
Case Study
Sweet Beginnings Co. is currently the most talked about clothing shop in town. Not only was the shop
filled with customers every day, but they have been a major supplier of clothing to other shops. Ms. Muff,
the owner of the shop has remained confident that the operations will go smoothly until one early
morning when there had been problems with the delivery that was supposed to leave the shop. The
clothes which were scheduled to be delivered were already packed and waiting on the loading bay. It was
past 30 minutes of the scheduled delivery and no delivery truck was in sight. Ms. Muff decided to call the
delivery contractor to find out what was taking the trucks so long.
“You’ve been one month late from your scheduled payment for our delivery service,” the frustrated
delivery contractor said. “We’ve been sending you notices every day for the past week and your company
doesn’t seem to be responding. Unless you will be able to pay the amount due by this morning, we will
not send any truck to deliver your goods.
Ms. Muff was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Muff hurriedly approached
the company’s accountant, Mr. Phil in hopes of drawing cash from the company. Mr. Phil regrettably
reported that the company does not have cash to pay the delivery contractor. In fact, the company has
been consistently borrowing short term funds for three months from the start of the year. The company
has yet to pay any of these borrowings and Mr. Phil informed Ms. Muff that the short term lenders have
been reluctant to lend money at this point.
As a result, the shipments will not be delivered to the customers until the company figures out how to
pay their delinquency with the delivery contractors. The outside customers have been understanding
enough to acknowledge that there will be a delay on the deliveries for this day. However, too much delay
may frustrate these customers and may cause bad reputation to the company. Ms. Muff is looking into
taking a loan from Fresh Rural Bank to pay for the delinquent fees. The bank manager of Fresh Rural Bank
has requested a meeting with Ms. Muff to discuss the financial condition of Sweet Beginnings Co. and
plans for restoring its liquidity.
Outraged, Ms. Muff told Mr. Phil, “Why don’t we have any balance in our cash account? Our company has
been very profitable but we seem to be depending on loans to finance our operations. We need to figure
out what is going wrong. Otherwise, we may lose our customers.”
Company Background
Sweet Beginnings Co. was founded in 20X0 as a manufacturer of summer clothes. The first shop was
located near a calm beach with sky blue waters and powdery sands. Families and tourist would usually
flock to the beach on summer weekends which gave the clothing shop foot traffic and gained the market’s
attention. Due to its high quality products, the clothing store became a popular stop shop for vacation
goers. In 20X1, a known blogger fancied the clothing line displayed in Sweet Beginnings and published an
article promoting the shop. This earned the company nationwide publicity which led to other clothing
stores offering shelf space for Sweet Beginning’s brand. In 20X3 it expanded its garment productions due
to the increasing demand of their products. To this day, the company maintained its position as a summer
clothing store since this line has brought its brand equity.
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Clothing Market
The demand for clothing was characterized by a stable year-to-year growth. Unit demand increased with
both population and individual income. However, the seasonal character of the company’s product has
resulted to cyclical sales.
Competition among other clothing shops in the town is unlikely to clash with the company’s sales growth.
The company believes it will maintain its average growth rate for sales for the succeeding years.
Sales Forecast
Sweet Beginnings Co. had been consistently profitable. Moreover, sales had grown at an annual rate of
18 percent in 20X5. Gross sales were projected to grow at 20% of the sales of the same months on the
first quarter, 30% of sales of the same months on the second quarter and 25% of sales of the same months
on the third and 4th quarter. This growth rate is expected to be constant until 20X8.
Financial Information
To prepare a forecast on a business-as-usual basis, Ms. Muff and Mr. Phil agreed on various parameters.
Cost of goods sold would run at 73.7% of gross sales—a figure that was up from recent years because of
increasing price competition. Operating expenses would be about 6% of sales —also up from recent years
to include the addition of a quality-control department and two new sales agents. Depreciation is at 10%
of cost of property, plant and equipment (PPE). Additions during 20X6 is expected to amount to
PHP1,200,000 which will be paid on January 20X7. The Company’s policy is to expense full year’s
depreciation on the date of purchase. The Company expects inventory level for 20X6 to be the same as
20X5.
The company’s income tax rate was 30% paid for each quarter in May, August, November, and April of
the following year, respectively. The company opts to use optional standard deduction of 40% from the
company’s gross profit to arrive at the taxable income for the quarter.
The delivery contractor’s fee (at 3% of sales) was collected at the loading gate as trucks left to make
deliveries to customers. Ms. Muff proposed to pay dividends of PHP450,000 per quarter. For years Sweet
Beginnings had paid high dividends.
Mr. Phil observed that sales collections in any given month had been running steadily at the rate of 40%
of the last month’s sales plus 60% of the sales from the month before last. The value of raw materials paid
in any month represented on average 55% of the value of sales expected to be made two months later.
Wages and other expenses in a given month were equivalent to about 34% of purchases in the previous
month. As a matter of policy, Ms. Muff wanted to see a cash balance of no less than PHP640,000.
Sweet Beginnings Co. had a line of credit from Fresh Rural Bank, where it also maintained its cash balances.
Fresh Rural Bank’s short-term interest rate was currently 16%. Return on investment for short term
investments is at 12%.
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Historical Information
Problem
Ms. Muff needs to prove that the company will be liquid enough to pay for its loans with Fresh Rural Bank
so that it will be allowed to ask for another loan to meet the delivery contactor’s fee. How should Ms.
Muff explain to First Rural Bank that the company is in a good financial position? Moreover, should the
company prove to have financial liquidity problems, what can to company do to cope with their need for
cash?
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Learner’s Guide
1. Assume that you are Ms. Muff and you will be presenting to the Fresh Rural Bank. Convince the bank
that you are in a good financial position evidenced by your cash budget and projected financial
statements.
2. Prepare a monthly cash budget for Sweet Beginnings Co. for the year ending December 20X6. Start
with the monthly sales forecast (Tip: Forecast sales up to Feb 20X7).
3. The following table format may be used for the cash budget:
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Income tax Gross profit x (1-40%) x 30%
Net profit
Format of Paper/Presentation
Presenting Group
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