Situation

Kota Fibres, Ltd. was a very profitable enterprise. Sales had grown at an annual rate of 18
percent in 2000. Gross sales were projected to reach 90.9 million rupees(Rs) in the fiscal year
ended December 31,2001. Net profits reached 2.6 million rupees(Rs) in 2000. However, they
had to depend on the bank to pay the bills especially during heavy selling season. Kota Fibres
had a line of credit from All-India Bank & Trust Company, where it also maintained its cash
balances. The seasonal line of credit had to be cleaned up for at least 30 days each year. The
usual cleanup month had been October, but Kota Fibres had failed to make a full payment at
that time. Only after strong assurances by Mrs. Pundir, the managing director and principal
owner of Kota Fibres, Ltd., that she would clean up the loan in November or December had
the bank lending officer reluctantly agreed to waive the cleanup requirements in October.
Mrs. Pundir need to a new financial plan for the company that demonstrated its ability to
clean up the loan by the end of 2001 using suggestions from her staffs.
Analysis
Assumptions
Ratio of:
Income Tax/Profit Before Tax
Excise Tax/Sales
This Month Collections of Last Month's Sales
This Month Collections of Month-before-Last Sales
Purchases/Two Months Advance Sales
Wages/Purchases
Annual Operating Expenses/Annual Sales
Capital Expenditures (every third month)
Interest Rate on Borrowings (and deposits)
Minimum Cash Balance
Depreciation/Gross PP&E (per year)
(per month)
Dividends Paid (every third month)

30%
15%
40%
60%
55%
34%
6,00%
350.000
14,5%
750.000
10%
0,83%
500.000

1. Memo from field sales manager(Pondicherry)

Pondicherry Textiles asked for credit terms of 80 days instead of standard terms which
is 45 days . Purchases would be Rs 6,000,000,000.
2. Memo from transportation manager(30 days inventory)
Raw material inventory requirement from 60 days to 30 days.

3. Memo from purchasing agents(Hibachi JIT)

Hibachi Chemicals of Yokohama proposed to supply polyester pellets. The pellets
account for 35 percent of raw material purchases and it will eventually reduce our
inventory of pellets from 60 days outstanding to only 2-3 days.
4. Memo from operation manager
GPM will increase 2-3% but Kota Fibers inventory will have shortage during the
peak season level cycle. Thus, Kota Fibers will lose its sales and miss its chance to
gain a big profit. As the result, it will increase debt firm needed. Overall, production
percentage of year 2001 will be 8.33% each month.
Comparative Overview of Financial Results Associated with Various Proposals
Base Case

Pondicherry

Debt Balance Summary

Debt Balance Summary

Jan 01

Inventory
Debt Balance
Summary

Hibachi
JIT
Debt Balance
Summary

Jan 01

1.344.093

Jan 01

1.200.185

Jan 01

1.353.298

June 01

1.146.269
32.950.66
5

June 01

35.809.122

June 01

25.435.575

June 01

24.728.089

Dec 01

3.463.702

Dec 01

3.897.616

Dec 01

2.957.147

Dec 01

1.844.640

Gross Profit

90.900.10
8
13.635.01
6
77.265.09
2
66.993.38
0
10.271.71
2

Operating Expenses

5.454.006

5.814.006

5.454.006

5.454.006

Depreciation

1.073.731

1.073.731

1.073.731

1.073.731

Interest Expense (Income)

1.835.620

2.024.489

1.442.475

11.145

Profit Before Taxes

1.908.354

2.037.485

2.301.500

2.407.054

572.506

611.246

690.450

722.116

1.335.848

1.426.240

1.611.050

1.684.938

90.392

275.202

258.698

Gross Sales
Excise Taxes
Net Sales
Cost of Goods Sold

Income Taxes
Net Profit
Net Profit vs. Base Case

96.900.108

90.900.108

90.900.108

14.535.016

13.635.016

13.635.016

82.365.092

77.265.092

77.265.092

71.415.380

66.993.380

66.993.380

10.949.712

10.271.712

10.271.712

Conclusion
All of the alternatives cannot clear the debt by the end of December. The lowest debt of all
options is memo from purchasing agent by coorperating with Hibachi Chemicals of

Yokohama and reducing inventory of pellets from 60 days outstanding to only 2 or 3 days.
However Kota Fibers need to loan another short-term debt if it uses either Pondicherry or
Hibachi JIT alternatives.