SOCIETY CLOTHING CORPORATION

Case No. 3
I.

Background of the Study

With its specialty in producing quality shorts for ballplayers, Society Clothing was
established 1991. These standard-sized shorts were sold P 80.00 per piece to wholesalers
and distributors, who at the same time distribute the product all over the city and in nearby
provinces.
In 1996, the Chief Executive Officer and at the same time one of the companys
stockholder, Ms, Shiela Lopez, sat down with the other stockholders with the main agenda
of making plan for 1997 and for the next three (3) years. After the said meeting, she had
with her a piece of paper with these statements written on it:
a. Achieve an annual 30% sales growth
b. Improve profitability
Having those objectives, she believes that these could be achieved if they would allow
and approve longer credit terms to their costumers and pay raw materials within the discount
period to their suppliers. Thus, their usual 30-day credit period will be extended 60 days and
will now pay 21 days after the receipt of the raw materials since suppliers grant 5 %
discount if they will do so.
By her own estimate, the company doesnt need to expand their current production
facilities. Instead, SCC will just have to alter their operation from one into two-shifts.
However, a bank loan is needed to finance accounts receivables and inventories. She met
with the loan officer of a local bank, Mr. Tamesis, and was being told that the bank will
finance the companys needs if she can present an acceptable financial plan showing their
capability to repay the loan within one-year.

On the other hand, SCC may also be an eligible borrower under the KASAPI Lending
Program of the Social Security System which 16% interest with a loan term of three to five
years.
II.Statement of the Problem
Considering that Society Clothing Corporation have their primary goal of improving
profitability by achieving an annual sales growth of 30%, SCC possess an anticipation that
their business is continuously growing. However, pushing through with those
transformations a loan is needed to finance accounts payables and inventories. Should they
decide on acquiring a bank loan that requires them to pay within a year? Or should they
borrow under KASAPI Lending Program of the Social Security System with 16% interest
with a loan term of three to five years?
In whichever firm they decide to have an access with their financial need Society
Clothing should prepare a cash budget in order to show their capability to repay either of the
firm.
III.

Alternative Courses of Action

Society Clothing Corp. could have the option of acquiring a loan from the local bank that

requires them to pay within a one-year credit term.

On the other hand, SCC could settle on acquiring a loan from KASAPI Lending Program of
SSS with 16% interest with a loan term of three to five years.

IV.

Analysis for the Courses of Action

Society Clothing Corp. could have the option of acquiring a loan from the local bank that
requires them to pay within a one-year credit term.
Based on research, as reported by the Bangko Sentral ng Pilipinas (BSP), from 1985 until
2013, Philippines Interest Rate averaged 9.9 Percent reaching an all time high of 56.6
Percent in December of 1990 and a record low of 3.5 Percent in September of 2012.

http://www.tradingeconomics.com/philippines/interest-rate

The succeeding data could also be considered as a reference :

Philippines Monthly Interest Rates

Period
2000

PHIBOR

Fixed
Deposits
3 Months

Fixed
Deposits
6 Months

Fixed
Deposits
12
Months

Saving
Deposits

Prime
Lending
Rate

Jan

9.3869

6.994

7.194

8.858

6.4

10.3

Feb

8.9625

7.001

8.186

8.762

6.2

10.2

Mar

9.1193

7.306

7.128

8.760

6.4

10.6

Apr

9.0000

5.518

5.620

8.307

6.3

10.3

May

9.4318

6.800

7.152

8.534

6.5

10.1

Jun

9.4792

7.424

7.615

8.579

6.4

10.6

Jul

9.4137

7.580

7.434

8.472

6.7

10.3

Aug

9.7582

7.269

7.530

8.637

6.7

10.9

Sep

11.5119

7.503

8.480

8.810

6.4

11.6

Oct

19.3665

12.007

9.119

9.600

7.8

10.7

Nov

18.1701

12.782

12.712

13.539

10.8

12.4

Dec

17.0188

11.477

11.604

12.550

11.2

13.1

http://dspace.fsktm.um.edu.my/handle/1812/619
Taking into account the averaged interest rate set by the Bangko Sentral ng Pilipinas
(BSP) which fall under 9.9% or 10% to be exact. Assuming that Society Clothing
Corporations CEO, Ms. Lopez, considers this option to make a bank loan to finance their
payables and inventories. SCC has to prepare an acceptable financial plan showing the
capability of the firm to repay the loan within one-year.
As targeted, the company aims to improved profitability and achieve an annual 30%
sales growth. Below is a forecasted sales for 1997 with an assumed 60-day credit period.
January

176,000

July

128,000

February

150,000

August

100,000

March

176,000

September

140,000

April

200,000

October

190,000

May

200,000

November

220,000

June

150,000

December

250,000

Based on SCCs given balance sheet and income statement for 1996, a balance
sheet and an income statement for 1997 is assumed based on the targeted 30% increase:
BALANCE SHEET
31Dec96

31-Dec-97
increase 30 %

Cash
Marketable Securities

20,000
5,000

26,000
6,500

Accounts Receivables

176,000

228,800

Inventories
Raw Materials
Finished goods

202,800
140,800

263,640
183,040

Net Fixed Assets

180,000

234,000

Total Assets

724,600

941,980

Accounts
Payable
Common
Stock
Retained
Earnings

A/P & Equity

AFN

500,000 500,000
138,800 138,800

724,600 750,340
191,640

INCOME
STATEMENT
Income Statement

Income Statement

31Dec96

Increase 30%

Sales

1,600,000

2,080,000

Less: Cost of good sold

1,280,000

1,664,000

320,000

416,000

Gross Profit

85,800 111,540

Operating
Expenses

Variable

80,000

93,350

180,000

180,000

60,000

142,650

Income tax (35%)

21,000

49,928

Net Income

39,000

92,723

Fixed

As mentioned earlier, loan officer of the bank required SCC to prepare a cash
budget showing the capability of the company to repay its loan. Before proceeding to the
formulation of the said requirement, the following data has to be known and be computed
for a well-guided financial plan:
Inventory Conversion Period (ICP) = (Inventory/ Cost of Goods Sold) x 360 days
= (446,680/ 1,664,000) x 360 days
= 97 days
This means that there is 97 days average length of time that SCC could convert materials
into finished goods and then sell those goods.
Days Sales Outstanding (DSO)
= Accounts Receivable
or
(Annual Sales/360)
Average Collection Period (ACP)
= 228,000
(2,080,000/ 360)
= 40 days
This represents the average length of time that SCC must wait after making a credit sale
before receiving cash.
Payables Deferral Period (DPO) = (Accounts Payable / Cost of Goods Sold) x 360 days
= (111,540/ 1,664,000) x 360 days
= 24 days
The computation shows that there is 24 says average length of time between the purchase
of raw materials and labor and the payment of cash for the firm.
Cash Conversion Cycle =
ICP +
DSO
DPO

97 +
40
24
=
113 days
This represents 113 days length of time between paying for labor and materials and
collecting on the receivables.
Guided by the previous computations being presented, the cash budget of Society Clothing
is attached on the succeeding page.
Given the cash budget, tied with the previous computation, it could be detected that Society
Clothing will have their first receivable to be collected on the month of May. This makes
them decide that they really have to cover up their deficit and look after for a financial
firm, in this case, the bank where they could acquire a loan.
The surplus, which is located at the bottom part of the cash budget reflects a negative cash
from February to June. Following the data, as reflected, SCC has to acquire an initial loan
of Php 65,872 for the month of February, followed by and additional loan of Php 133,618
for the month of March. After gradually paying for it with its monthly income, by the
month of May and June the company already shows a positive net cash flow but still left
with a negative surplus which is lesser than the previous month. This is a good indicator

that the company is already coping. By July SCC will already surpassed its deficit.
On the other hand, SCC could settle on acquiring a loan from KASAPI Lending Program
of SSS with 16% interest with a loan term of three to five years.
By simply looking into the interest rate of the bank versus the rate under the KASAPI
Lending Program of SSS, which is 16%, it is obvious to speak that the bank offers a much
lower interest rate. This view takes into account the concept of short-term and long-term
loan. But on the other hand, even though short-term loan is often less expensive than longterm loan, short-term credit subjects SCC to more risk than long-term financing. Firstly, if a
firm borrows an amount to KASAPI, which is considered as a long-term loan basis, its
interest costs will be relatively stable and perhaps even fixed over time.

If it takes the bank, which is a short-term loan, there is a possibility that its interest will
fluctuate widely.
Furthermore, if a firm borrows heavily on a short-term basis, and it could find itself
unable to repay its loan, and it might be in a weak financial position that Society Clothing
will fail to meet its forecasted sales which will in turn allow the lender (KASAPI) to refuse
SCC from extending the loan. This could give a possibility for SCC to lead into
bankruptcy.
V.

Recommendation
Based on the findings being presented it would be better for Society Clothing
Corporation to settle for a short term bank loan with an assumed 10% interest rate rather
than obtaining it in KASAPI Lending Program of SSS. As reflected in the cash budget data,
the company could be able to cover up its deficit for an estimated time frame of six (6)
months from February to July, after acquiring a loan in the month of January. This means
that if the company would be able to achieve its forecasted sales for 1997 it wouldnt be
tough for the company to compensate for its shortfall in less than a year. Although,
borrowing from KASAPI is another underlying option for SCC but since they are capable of
paying the amount in a shorter time then they should take advantage on paying it in a much
lower interest rate rather than paying the higher one.

VI.

Conclusion
Based on the study, it is concluded that any firm must take a careful and thorough
analysis with regards to its financial plan before considering any future actions such as
taking some loans or acquiring additional assets for added investments. By doing so, this
will allow the company to take some rational and reasonable assumptions that would lead
itself into a well-guided path.
Moreover, after taking a careful look with their financial plan, another important
decision that has to be considered by the company is choosing the right financial firm that

would supplicate its financial need. Thus, deciding whether to settle for acquiring a shortterm or a long-term loan. Being caught with this decision making point, the advantages and
disadvantages of each type of loan must also be reconsidered and be scrutinized by the
company as well.
After taking such actions, the company should already have a clear and comprehensive
judgement for its concern.

SOCEITY CLOTHING CORPORATION

CASE NO. 3

A Case Analysis

Presented to the Graduate School

HOLY CROSS OF DAVAO COLLEGE

In Partial Fulfilment
of the Requirements for the Subject
Financial Management

Master in Management
by
RANDY ANDRIN
JESSIELYN A. PULVERA
GELLI ANN DELA ROSA
November 2013