Question

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. August and September 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