Background

Kota Fibres, Ltd., was founded in 1962 to produce nylon fiber at its only plant in Kota, India.
By using new technology and domestic raw materials, the firm had developed a steady
franchise among dozens of small local textile weavers. It supplied synthetic fiber yarns used
in weaving colorful cloths for making saris, the traditional womens dress of India. With
Indias female population at around 500 million, the demand for saris would account more
than 12 billion yards of fabric. The demand itself for sythetic textiles was characterized by
stable year-to-year growth and predictable seasonal fluctuations. Competition among
suppliers (the many small textile-weaving mills) to these merchants was keen and was
affected by price, service and credit that the mills could grant to the merchants.Ms. Pundir is
the managing director and principle owner of the firm.
Here are the resume of company performance :
1.
2.
3.
4.

Consistently profitable
Sales had grown annual rate of 18% in the year 2000
Net profits reached INR2.6 million in 2000
Gross sales were projected to reach INR90.9 million in the fiscal year that ended
December 31, 2001

Issue of the Case

One morning, trucks filled with rolls of fiber yarns were being unloaded in the
parking lot if the companys plant. The government tax inspector would not clear the trucks
for departure because the excise tax had not been paid. The company want to pay the tax with
a cash payment (because the tax inspector required them to), but they discovered that the
company had overdrawn its bank account. In the other word, Kota Fibres, Ltd. is lacking of
money (cash). The reasons for this problem and other problem which faced by company are:

Kota Fibres, Ltd. pay quite a lot dividends to their shareholders because they believe
that excess funds left in the firm were at greater risk than if the funds were returned to
shareholders.
Kota Fibres, Ltd. cannot pay the loan to All-India Bank on time. In the other hand,
they need to propose new loans from All-India Bank to run their business. But, with
their current financial forecast for 2001, the bank probably will not give the loan to
Kota Fibres, Ltd.
Declining profitability
Due to inflation, interest rate may rise in upcoming year on the loans

Analysis
Ratio Analysis
Table 1. Ratio Analysis
2
000
Liquidity Ratio
3.
Current Ratio
244748
2.
Quick Ratio
379443
Activity Ratio
Inventory Turnover
4
Ratio
3.12084
Inventory Turnover
8.
Ratio (in days)
464584
Receivable Turnover
2
Ratio
4.12791
Receivable Turnover
1
Ratio (in days)
5.12771
5.
Total Asset Turnover
706208
Payable Turnover
Ratio
2
Operating Cycle (days)
3.59229
Cash Cycle (days)
0.
Debt Ratio
10858
3.
Time Interest Earned
938596

2
001
1.
51
1.01

30.10
12.12
20.80
17.55
5.82

2
9.67486
0.
284125
2.
039624

To measure this company performance we perform ratio analyis. First is liquitdity

ratio, we can see in the table 1 in 2000 the company current ratio is 3.2 and in the forecast
2001 is 1.5, for both year the current ratio is in acceptable value because is greater than one
and this show the company can pay their short liabilities but the problem is there is declining
value of current ratio and quick ratio this mean there is declining in company ability to pay
they short term loan this will make the bank will not allowed us to propose the new loan. The
quick ratio in 2001 forecast shown value 1.01 this will lead to problem that with this
forecasting the company will has problem to pay their loan. This factor shown there is
problem for this company performance.
From the activity ratio we can see there is inclining in Inventory Turnover Ratio (in
days) this is good sign that this company can operater more efficiently because there is
improving time storage goods in inventory. The Receivable Turnover Ratio (in days) also
shown increasing value, its mean there is improvement in time collect company account
receivable but the in reality the company still lack of cash to pay their loan to bank.

The last is debt ratio shown the increasing from 0.1 to 0,28 this is shown there is
increasing need of debt for company to run their the bussines.
Financial Projection Analyisis
Memo from field sales manager
From the memo sent by field sales manager, the sales manager propose to give an
exception to Pondicherry for the credit standart trem from 45 days to 80 days. If this term
allowed the Pondicherry will purchase Rs6.000.000,- from aour company. Our suggestion is
to reject this proposal because this company already suffer because lack of cash and this
proposal will make the company need another cash money to buy raw material and
production cost but the result of sales will be in account receivable and became another
weight for our cash flow. Even will generate another sales but because the payment will be in
account receivable will make our comapany more suffer because lack of cash.
Memo from Operating Manager
The operating manager propose new scheme of production efficiencies, this scheme
will make our gross profit by 3 %, with this assumption will make our debt in december 2001
decrease from Rs.3463701,- became Rs.3221857,- this way is very useful to decrease our
debt so we suggest to apply this proposal.
Memo from Transportation Manager and purchasing agent
The transportaion manager and purchasing agent propose new scheme of inventory
and will make improvement in company raw material inventory. This will decrease company
operating expense becase the decrease in holding cost. We will make assumption that this
proposal will decrease the Annual Operating Expenses/Annual Sales become 5%, with this
assumption our loan debt will decrease from Rs.3,221,857,- will become Rs.2,472,425,Shareholder Divedent Scheme
After applying two proposal above we still lack Rs.2,472,425,- to pay our debt. We
suggest the company to make a new scheme about divident. This company already pay high
divedent every year. To pay the company debt in the end of december 2001 we seuggest in
this year the company does not pay the divident. If in 2001 the company does not pay the
divident, the company will hase money to pay the debt and the loan will reduced to
Rs.366,746,-.
Conclusion
The Kota Fibres need to change their management style, Mr.Pundir need to think
about their dividen policy. Mr.pundir need to consider the company need of cash for run the
company rather than prioritze dividen shares to their share holder. The Mr.pudir need to
considerprioritze dividen shares to their share holder. The Mr.pudir need to consider the
advice form Transportation Manager and purchasing agent to improve their inventory and
reduce their operating cost so they do not need too much loan to fund their operating.
The kota fibres need to change their strategy in 2001 because we can see in the exhibit
2, the net profit from 1999 until 2001 always declining despite of the increase of sales, this is
because the increasing of operation expense along the time.

Exhibit calculation
Table 1 Our 2001 final financial projection
KOTA FIBRES, LTD.
Assumptions
Ratio of:
Income Tax/Profit Before Tax
Excise Tax/Sales
This Month Collections of Last Month's
Sales
This Month Collections of Month-beforeLast Sales
Purchases/ Sales two months later
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)

Jan '01
1061135
June
'01
31482322
Dec '01 366746.2
0.3
0.15
0.4
0.6
0.55
0.34
0.05
350000
0.145
750000
0.1
0.008333
0