Kota Fibres Ltd

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1. Problem Statement

From the case study, we noted that several financial problems faced by Kota Fibres, Ltd. The problems are listed as below:- (a) The Company has liquidity problem, whereby it is in a negative cash position, i.e. cash borrowings is higher than its own cash. At the end of Dec 2001, it is forecast to have a debt outstanding of INR3.5 million;

(b) In this current position, the Company would not be able to fulfill its promise to lending officer of All-India Bank & Trust Company of having to clean up seasonal line of credit for at least a month;

(c) Looking at the Exhibit 2, we can observe that although the Company is forecasted its net sales registering growth of 20% in 2001, it does not translate to an improved bottom line, i.e. Profit Before Tax (PBT). Its PBT is expected to decrease by 48% in 2001. There are several factors leading to this performance:- (i) Its gross profit margin is on downtrend, from 18.8% in 1999 to 13.3% in 2001 as cost of goods increase; (ii) Its operating expenses is on the uptrend, increased by 13% in 2001; (iii) Correspondingly, its depreciation also increased by 18% in 2001; (iv) As more and more line of credit taken by the Company, its interest cost also goes up by 48% in 2001; (v) As such, because of this, the financial performance for 2001 will not be any better than previous years as its net profit plunged by 48% in 2001.

(d) In Exhibit 3, among notable item for a cause of concern are as follows:- (i) Its Accounts Receivable increase by 39% in 2001. This is expected as the Company push for more sales and given a generous credit term to customers in order to win more sales; (ii) Its inventories level also goes up by 78% in 2001 as to cater increase in demand for the production which translated to more sales; (iii) Its Accounts Payable has also correspondingly increase to INR1.2 million or 52% in 2001; (iv) The most worrying part is on a significant increase in Notes to Bank (Deposits at Bank) of a whopping 406% jump from previous year. (v) As such, with this is the current scenario, it is likely that the Company will go bust should no drastic action taken to remedy the situation. In view of this situation, a revised schedule of cash receipt and disbursement has been constructed as shown below. Several recommendations have been included in the revised cash budget and it looks promising compared with the original one. Details of explanation has been included right after the cash budget.

KOTA FIBRES, LTD.|
Revised Schedule of Cash Receipts and Disbursements for 2001 IINR)| | | | January| February| March| April| May| June| July| August| September| October| November| December| Assume:| | | | | | | | | | | | | | |

Sales| | | 2,616,120 | 2,892,825 | 4,447,404 | 8,804,250 | 13,885,560 | 17,588,376 | 16,315,533 | 8,572,824 | 5,031,000 | 4,447,404 | 3,531,762 | 2,767,050 | Purchases (1)| 55%| 1,591,054 | 2,446,072 | 4,842,338 | 7,637,058 | 9,673,607 | 8,973,543 | 4,715,053 | 2,767,050 | 2,446,072 | 1,942,469 | 1,521,878 | 1,870,526 | Debt Outstanding| 684,102 | 883,194 | 1,479,632 | 3,635,238 | 8,262,641 | 14,676,601 | 21,266,686 | 20,721,112 | 11,707,792 | 4,545,235 | 1,728,550 | 453,648 | (228,138)| Receipts:| | | | | | | | | | | | | | |

Accts Rcvble Collected| | 2,515,500 | 2,374,632 | 2,726,802 | 3,514,657 | 6,190,142 | 10,836,774 | 15,366,686 | 17,079,239 | 13,218,449 | 7,156,094 | 4,797,562 | 4,081,147 | New Borrowings (Repayments)| 199,092 | 596,438 | 2,155,606 | 4,627,404 | 6,413,959 | 6,590,085 | (545,573)| (9,013,320)| (7,162,557)| (2,816,685)| (1,274,902)| (681,785)| | | | 2,714,592 | 2,971,070...
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