Question

MAMMA MIA, INC.
Cash Budgeting

** Please show calculations
Mamma Mia, a company selling vintage branded items through a network of retailers in Illinois, has recently implemented a budgeting system
Presented below is a month-wise income statement from August through December 2017. July and August are actual results, while October
through December are Plan/Budget numbers
Monthly Income Statement
Amounts in $'000s
ACTUAL PLANNED/ BUDGETED
Aug-2017 Sep-2017 Oct-2017 Nov-2017 Dec-2017 Total Q4
Sales            380            390            400            430            480         1,310
Cost of goods sold            260            268            210            220            245            675
Gross Profit            120            122            190            210            235            635
Less: Selling, General and Admin expenses                -  
Marketing Expenses               14               15               12               14               12               38
Sales Commission               11               12               12               13               14               39
Administration expenses               40               42               30               32               38            100
              65               69               54               59               64            177
Net Income Before taxes               55               53            136            151            171            458
Provision for Income Taxes               15               14               37               41               46            124
Net income After Taxes               40               39               99            110            125            334
Additional information is provided as follows:
1. Sales numbers are based on the Sales Budget, which includes an assumption that 20% of net sales are to customers who avail of cash discounts of 10%
2. Out of credit sales, it is assumed that 60% is collected in the following month and 38% in the month after that. 2% will be uncollectible.
3. All purchases and related costs are from a central distributor, who provides 60-day credit.  
4. Marketing expenses and selling commissions are paid monthly in arrears
5. Assume all Administration expenses are paid in the same month as they are incurred
6. Taxes are paid twice annually, in January and July
7. Cash balance on Sep 30, 2017 is 700,000
Q1. Prepare a Monthly Cash Budget for the 4th quarter of 2017
Q2. A loan covenant with First Chicago Bank requires that cash balance be at least $1 MM as of Dec 31, 2017.
     a) Using just the Plan/Budget data, what is the likelihood that the loan covenant will pose a problem for the Company?
     b) Examining and considering all available data, how would your answer change?

Answer 1

Particulars	October	November	December	Total Q4
	$	$	$	$
Receipts
Sales
Cash Sales @20%	80	86	96	262
Less: Discount	-8	-8.6	-9.6	-26.2
Credit sales@80%
received in following month 60%	187.2	192	206.4	585.6
received in next to following month 38%	115.52	118.56	121.6	355.68
Total Receipts	374.72	387.96	414.4	1177.08
Payments
Cost of Goods sold 2 months credit	260	268	210	738
Marketing Expenses ( 1 month arear)	15	12	14	41
Selling Commission ( 1 month arear)	12	12	13	37
Admin expenses	30	32	38	100
Taxes	0	0	0	0
Total payments	317	324	275	916
Opening Balance	700	757.72	821.68
Net receipts/ (payments)	57.72	63.96	139.4
Closing Balance	757.72	821.68	961.08

A loan contract was made by the company with First Chicago bank in order to have minimum cash balance $ 1,000,000.

As on 31st december the cash and balance as per company records was $ 961.08 thousands i.e., balance $ 38.92 thousands was to be applied to bank for Loan.

The Company's projected net profit was increasing at a high rate. There is a possibility for the company to repay the loan in timely installments. I sugest the chicago bank to provide the loan facilty.