Current situation of Kota fibres and reasons for less cash

Kota fibres were continuously borrowing money from all India bank because:

 Peak sales around late summers due to festival Diwali, due to which financial requirements
varied between the year

Key determinant for borrowing of Kota

 More the credit more the sales. Sales depend upon credit period
 Strong stock in advance only during peak seasons (require more loan during this period)
 More credit more market share.

Production and distribution system.

 Due to bad infrastructure, transportation period of raw material is increasing, which will
increase the cash cycle.- supply of order is getting delayed

Being a profitable company, company has always given high dividend.

From exhibit 2, the company is paying dividend of Rs 500000 quarterly, which means Rs. 20, 00,000
for a year. Net profit is Rs. 25, 50,837, which means cash left for the year 2001 – Rs. 5, 58,337

Cash to be maintained at the start of the year Rs. 7, 50,000, so a loan of approx 2, 00,000 to reach at
that level.

Cash cycle-

Inventory turnover ratio- COGS/inventories =5, 38, 65,911/12, 49,185, which is equal to 43.12

Inventory turnover in days- 365/43.12= 8.4 or 8 days

Receivable turnover ratio- Net sales/ account receivables =6, 44, 87,385/26, 72,729= 24.12

Receivable turnover in days= 365/24.12= 15 days

Payable turnover ratio- purchases/ accounts payable

4, 24, 19,371/7, 59,535= 55.85

Payable turnover in days= 365/55.85= 6 days

Operating cycle= Inventory turnover in days+ Receivable turnover in days = 8+15= 23

Cash cycle=23-6= 17 days

This makes a total of 17 days to realize the cash after investing in production.

Inventory of 60 days, which blocks cash for the same period.

So by these information we can say that Kota Fibres is running out of cash which make it necessary
to borrow money in short run from All India Bank.