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. Pao in hopes of drawing cash from the
company. Mr. Pao 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.
Pao 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. Pao, “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.
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. Pao 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. Pao 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%.
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?

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: 

4. Prepare the Financial Statements with the following details:
Format of Paper/Presentation

Prepare a paper containing the following:

1. Letter to Fresh Rural Bank explaining that the company is in a healthy financial
position and has capacity to pay loans when they come due. 

2. Cash Budget for 20X6 in good form. 

3. Projected Financial Statements for 20X6 in good form.
4. Supporting computations. 


Presenting Group

Prepare a 10-minute presentation using the following outline

• Case Background: Brief explanation of the problem of the Company.
• Methodology: Explain why the cash budget and projected financial statements was
made in order to help the company in their dilemma.
• Budgets and Projections: Present the resulting budgets and implications of the
figures that were derived. Explain in class how you were able to derive your figures.
• Conclusion: Was the company performing well based on the budgets and projections
and will it be able to sustain its operations?

Critic Group

Take the point of view of Fresh Rural Bank. From the presentation of Budgets and
Projections, ask questions that will challenge the presenting group’s conclusions. The critic may
also ask clarifications on the presentation or comment on how differently they did their analysis.