case study presentation on kota fibers limited
TRANSCRIPT
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Case Study Presentation onKOTA FIBRES LTD.
Presented by :- Chandresh
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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
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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
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What KFL does?
Suppliers
• Polyester Pellets and other Raw Materials
KOTA FIBRES LTD.
• Sari’s and Textiles
End User
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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
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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
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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
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Result
FAILURE..
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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
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Inventory turnover ratio =53,865,911 / 1,249,185= 43.12
Inventory conversion period ( in days)= 365/43.12= 9 days (approx)
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• Receivables Turnover Ratio= 64,487,385 / 2,672,729
= 24.12• Receivables collection period (in days)
= 365/24.12
= 16 days (approx)
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• Payable turnover ratio= 41727114/759535=55
• Payable turnover (in days)= 365/55= 6 days approx
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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
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WHAT ACTUALLY WE HAVE TO DO?
• To reduce the outstanding debt• To increase the cash availability• To enhance the cash flow
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Some more aspects……
• Huge inventory• Account receivables on liberal credit terms• High dividend payouts• Inability to pay taxes
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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
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• 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.
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RECOMMENDATION
Revise Credit term
Just-in-time concept
Decrease the dividends
level production
Reduce inventory
Pay Excise tax on the move
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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
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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
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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
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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
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So, the ultimate proposal….
30 day Inventory Policy
Reduce
d Dividends
Partial JIT
Minimum
Cash
Balanc
e
Level
Production
More
Profit
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