Shimingken Trading Co.

Case Study

Shimingken Trading 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.
Tine, 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. Tine 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. Tine was astounded to hear of the unpaid fee. To clear up the mishap, Ms. Tine hurriedly
approached the company’s accountant, Mr. John in hopes of drawing cash from the company. Mr. John
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. John informed Ms. Tine 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. Tine is looking into
taking a loan from Quezon Rural Bank to pay for the delinquent fees. The bank manager of Quezon
Rural Bank has requested a meeting with Ms. Tine to discuss the financial condition of Shimingken
Trading Co. and plans for restoring its liquidity.

Outraged, Ms. Tine told Mr. John, “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

Shimingken Trading Co. was founded in 2015 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

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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 2016, a known blogger fancied the clothing line displayed in Shimingken Trading and
published an article promoting the shop. This earned the company nationwide publicity which led to
other clothing stores offering shelf space for Shimingken Trading’s brand. In 2017, 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

Shimingken Trading Co. had been consistently profitable. Moreover, sales had grown at an annual
rate of 18 percent in 2019. 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 2021.

Financial Information

To prepare a forecast on a business-as-usual basis, Ms. Tine and Mr. John 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 2019 is
expected to amount to P1,200,000 which will be paid on January 2020. The Company’s policy is to

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expense full year’s depreciation on the date of purchase. The Company expects inventory level for 2020
to be the same as 2020.

The company’s income tax rate was 30% paid for each quarter in January, April, July, and October 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. Tine proposed to pay dividends of P450,000 per quarter. For years,
Shimingken Trading had paid high dividends.

Mr. John 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. Tine wanted to see a cash balance of no less than P640,000.

Shimingken Trading Co. had a line of credit from Quezon Rural Bank, where it also maintained its cash
balances. Quezon Rural Bank’s short-term interest rate was currently 16%. Return on investment for
short term investments is at 12%.

Historical Information

Sweet Beginning Co.

Historical Income Statements
2018 2019

Gross Sales 55,546,936 66,306,050

Cost of Goods 38,327,385 46,398,029

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 Gross Profit 17,219,551 19,908,021
Sweet Beginnings Co. Delivery Fees 1,666,408 1,989,182
Monthly Sales Operating Expenses 3,012,444 4,159,275
2019 Depreciation 869,600 869,600
2019 Interest Expense 910,000 1,240,000
January 1,361,240 Pre-tax Profit 10,761,099 11,649,964
February 2,035,060 Income Tax 3,099,519 3,583,444
March 3,008,340 Net profit 7,661,580 8,066,520
April 6,193,650

May 10,617,680

June 13,449,060

July 12,475,770

August 6,282,130

September 3,539,230

October 3,008,340
November 2,388,980

December 1,946,570

Total 66,306,050

Sweet Beginning Co.

Balance Sheet
December 31, 2019
Cash 641,123

Accounts Receivable 3,379,958

Inventories 1,076,000

Short term Investments

Total Current Assets 5,097,081

Property, Plant, and Equipment (Gross) 8,696,000

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Accumulated Depreciation 1,278,500

PPE (Net) 7,417,500

TOTAL ASSETS 12,514,581

Accounts Payable 654,234

Short term Borrowings 587,575

Payable to PPE Supplier

Accrued taxes 1,321,900

Total Current Liabilities 2,563,709

Owner’s Equity 9,950,872

TOTAL LIABILITIES AND EQUITY 12,514,581

Problem
Ms. Tine needs to prove that the company will be liquid enough to pay for its loans with Quezon Rural
Bank so that it will be allowed to ask for another loan to meet the delivery contractor’s fee. How should
Ms. Tine explain to Quezon Rural Bank that the company is in a good financial position? Moreover,
should the company prove to have financial liquidity problems, what can the company do to cope with
their need for cash?

Learner’s Guide

1. Assume that you are Ms. Tine and you will be presenting to the Quezon 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 Shimingken Trading Co. for the year ending December 2020. Start
with the monthly sales forecast (Tip: Forecast sales up to Feb 2021).
3. The following table format may be used for the cash budget:

January February … November December TOTAL

Cash Receipts from Collection

Less: Purchase of Raw Materials

Less: Payment for Salaries and Wages

Less: Payment for Delivery Contractors

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Less: Dividends Paid

Less: Income tax Paid

NET CASH FLOW

Add: Beginning Cash

Less: Required Ending Balance

Add: Return on Investment (12%)

Less: Interest on Borrowing (16%)

Less: Repayment of Principal

Add: Liquidation of Investment

REQUIRED FINANCING

EXCESS CASH

January February … November December TOTAL

Loan Balance - Beginning
Add: Required Financing

Less: Repayments

Loan Balance - Ending

January February … November December TOTAL

Investment Balance - Beginning

Add: Excess Cash

Less: Liquidations

Investment Balance - Ending

3. Forecast Financial Statements. Start with income statement.

Gross Sales Total of Monthly Forecast Sales

Cost of goods 73.7% of Sales

Gross Profit

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Delivery Fees 3% of Sales

Operating Expenses 6% of Sales

Depreciation 10% of Total PPE cost

Interest Expense Total of Interest from borrowings and return of investment from cash budget

Pre-tax Profit

Income Tax Gross Profit x (1-40%) x 30%

Net Profit

5. Forecast Financial Statements. Start with income statement.

Cash Required Cash Balance

Accounts Receivable A/R Beginning + Sales - Collection from Customers

Inventories Same as last year

Short term inventories Resulting balance from cash budget

Total Current Assets

Property, Plant, and Equipment (Gross) Beginning Balance + Current Year Additions
Accumulated Depreciation Beginning Balance + Depreciation Expense

PPE (Net)

TOTAL ASSETS
Accounts Payable Accounts payable 2019 + Purchases* + Operating
Expense - Cash payment for raw materials - Cash
Payment for Salaries and Wages

*Purchases = Cost of goods sold + Inventory 2020 –

Inventory 2019

Short term Borrowings Resulting balance from cash budget

Payable to PPE Supplier Additions to PPE payable on January 2021

Accrued taxes Tax payable for the last quarter

Total Current Liabilities

Owner’s Equity Owners’ Equity 2019 + Net Income - Dividends paid

TOTAL LIABILITIES AND EQUITY

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Format of Paper/Presentation
Prepare a paper containing the following:
1. Letter to Quezon 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 2020 in good form.
3. Projected Financial Statements for 2020 in good form.
4. Supporting computations.

Presenting Group
Prepare a 20-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 Quezon 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.