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F I N A N C E

KOTA FIBRES

Erryn M Paramytha 29115016

Joshua Marvel L G 29115314

Mila Mujaadilah 29115053

Ridho Riadi Akbar 29115093

YP 53 B

SCHOOL OF BUSINESS AND MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION

INSTITUT TEKNOLOGI BANDUNG

2016

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Background

Kota Fibres, Ltd. was founded in 1962 in Kota, India. Created to produce nylon Fibre, Kota

Fibres provided synthetic Fibre yarns to local textile weavers mainly to make the traditional

womens dress in India; the saris. Ms. Pundir was both the managing director and principal owner

of the company. Kota Fibres used new technology and domestic raw materials to produce their

quality product. The demand for saris amounted to 12 billion yards of fabric.

Demand fluctuated based on special Indian festivals and celebrations, and more specifically

on the Diwali; a special celebration in mid-autumn.

Kota had policies which required a plan of

seasonal production. Kota operated at peak capacity for two months and decrease capacity for the

rest of the year. Kota Fibres had been a profitable company through the years. Sales were up 11

percent in 2000.

Problem

Payment of excise tax to move their product

Line of credit not being repaid according to the term.

Request for new loans from All-India Bank & Trust Company.

Due to inflation, interest rate may be higher in upcoming year on the loans.

Analysis 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

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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.

Dividends to be paid quarterly = Rp 5,00,000

Total annual dividend paid = Rp 20,00,000

Net profit in 2000 = Rp 25,50,837

Cash left for next year =Rp (2550837-2000000)

= Rp 5,50,837

Desired Cash Balance = Rp 750000

New loan required = Rp 1,99,163

ConclusionThe 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 unfavourable 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.

Suggestion

Overall, Kota Fibres, Ltd. is doing a good job at managing their liquidity, although the projectiondoes show a slight decline in this area. This means they could have potential issues with paying

their bills on time and converting their assets to cash if they follow the 2001 projection.

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we would suggest that the company must go for this proposal as they can increase liquidity by

decreasing the inventory period from 60 to 30 days. The firm should move towards inventory

reduction cutting down the cash cycle and increase its liquidity. This will tie up less cash in

inventory that is sitting in the warehouse. From these plans, company does not have to purchase

more inventory in the first two months since it will use raw material on hand and order accordingly.