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 women’s 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 The Case Papers
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 women’s 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, resulting in a stable and growing business. Demand fluctuated based on special Indian festivals and celebrations, and more specifically on the Diwali; a special celebration in mid-autumn. The unit growth forecast for Kota Fibres was 15% per year yet delivery of the yarn and several other small factors would soon play a part in their implausible success. Consumers in the villages purchased the cloth from the cloth merchant. The cloth merchant granted credit in order to support sales. The suppliers were very competitive in order to keep the merchants. They were aggressive in price, service, and credit line. Due to the fact that profit margins were thin, 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. This caused continuous hiring and layoffs. Kota had two distribution warehouses, but regardless, moving the yarn from Kota to the customer was a problem with the trip taking 10 to 15 days and the roads typically rough and one lane. Kota Fibres had been a profitable company through the years. Sales were up 11 percent in 2000. 2001 brought on challenges questioning the firm’s liquidity as Kota began to continuously overdraw on their bank account. The following issues surfaced in 2001 with Kota Fibres, Ltd.: 1.Payment of excise tax to move their product
2. Line of credit not being repaid according to the term. 3. Request for new loans from All-India Bank & Trust Company. 4. Due to inflation, interest rate may be higher in upcoming year on the loans
When preparing a forecast, Ms Pundir, the owner, and Mr. Mehta, the bookkeeper, agree on various procedures to arrive at the numbers. The forecast should be based on actual figures. The owner should have the bookkeeper or preferably a financial person, prepare the forecast, and Ms. Pundir should be reviewing the final report. Ms. Pundir and Mr. Mehta added a quality control department with two sales agents and three nephews in order to build an allegiance to the Pundir family. There was no review or analysis mentioned in the case as to whether a quality control department was needed. There seems to more of an interest in tending to the needs of the family rather than what’s best for the business. Kota had always paid high dividends because the Pundir family believed excess funds were at risk being left in the company and so the funds should be distributed as dividends. It seems the major priority of the business is payout of dividends to the shareholders (family). Since this is a high priority of the business, then ethics might be pushed to the side to arrive at the right numbers for the bottom line. As the goal of financial management is to maximize shareholder wealth, the costs of following these high dividends for the past forty-seven years have become a large factor in bankrupting the company. Rather than valuing hard-working employees and keeping them all year long rather than working them to death...