Case Study Presentation onKOTA FIBRES LTD.

Presented by :- Chandresh

Introduction to the case study

About •Kota Fibres Ltd•Financial problems in KFL

Owner •Ms. Pundir , managing director and principle owner of the firm.

What to do? •cash forecasting and recommending solutions to overcome the liquidity crunch

About Kota Fibres Ltd.

• 1962• At Kota (only plant)

Founded in

• Textile Industry• using new technology and domestic raw

materials, the firm had developed a steady franchise among dozens of small, local textile weavers

Services

What KFL does?

Suppliers

• Polyester Pellets and other Raw Materials

KOTA FIBRES LTD.

• Sari’s and Textiles

End User

Company Performance

Consistently profitable

sales had grown at an 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

Major problems of KFLline of credit at the All-India bank

loan repayments to be done to All-India Bank

Payment of excise tax to move their product

Request for new loans from All-India Bank

Interest rate may rise in upcoming year on the loans

Declining profitability

Early Reassessment

Cost of goods sold would run at 73.7%

of gross sales

Operating expenses would be about 6%

of sales

Addition of a quality-control

department

Two new sales agents

Dividends of INR500,000 per

quarter to the 11 members

Result

FAILURE..

Financial Ratios

• Current ratio of 2000= 4684237/1443637 = 3.244

• Quick ratio = 1• Forecasted current ratio for 2001

= 6690525/4440345

= 1.506 (< 2.0,not acceptable)

• Forecasted quick ratio = 1

Inventory turnover ratio =53,865,911 / 1,249,185= 43.12

Inventory conversion period ( in days)= 365/43.12= 9 days (approx)

• Receivables Turnover Ratio= 64,487,385 / 2,672,729

= 24.12• Receivables collection period (in days)

= 365/24.12

= 16 days (approx)

• Payable turnover ratio= 41727114/759535=55

• Payable turnover (in days)= 365/55= 6 days approx

Financial Analysis of the company

• Dividends to be paid quarterly = Rs 5,00,000• Total annual dividend paid = Rs 20,00,000• Net profit in 2000 = Rs 25,50,837• Cash left for next year =Rs (2550837-2000000)

= Rs 5,50,837Desired Cash Balance = Rs 750000

New loan required = Rs 1,99,163

WHAT ACTUALLY WE HAVE TO DO?

• To reduce the outstanding debt• To increase the cash availability• To enhance the cash flow

Some more aspects……

• Huge inventory• Account receivables on liberal credit terms• High dividend payouts• Inability to pay taxes

Conclusions

• The proposal from Mr. A. Bajpai is good in long term but it cannot satisfy the current need of the company. Since the credit term is of 80 days, it can put an unfavorable effect on the business. They will have less cash on hand, huge amount in bills receivables which will not allow Kota Fibres to be able to pay off the All-India bank before December

• It may set up precedence for other customer to demand for an increase in the credit period

• Proposals from the Transportation Manager and the Purchasing manager should be considered seriously. It can result in less inventory expenditures and can increase the amount of overall liquidity.

RECOMMENDATION

Revise Credit term

Just-in-time concept

Decrease the dividends

level production

Reduce inventory

Pay Excise tax on the move

Credit Term

• Since the company has a huge accounts receivable , it must check out its credit term.

• It may reduce its credit term from 45 to 30 days

Just-in-time concept

• Hibachi Chemicals of Yokohama can account for 35% of our raw - material purchases

• It would reduce the inventory of pellets from 60 days outstanding to only 7 to 10 days

Reduced Dividends

• Since the company is providing a huge dividend of Rs 500000 quarterly to Ms. Pundir’s extended family, it must reduce its dividend by 50% or go for half-yearly dividend in place of quarterly payment

• It will provide more cash in hand to overcome the requirements in the peak season

• csf.xlsx

Level Production

• Gross profit margin would rise by 2% or 3%• Level production entails lower manufacturing

risk• Seasonal hirings and layoffs would no longer

be necessary

So, the ultimate proposal….

30 day Inventory Policy

Reduce

d Dividends

Partial JIT

Minimum

Cash

Balanc

e

Level

Production

More

Profit