Kota Fibers

8/4/2019 Kota Fibers

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Prepared By-

Shivendra Singh 122

Navjyot Singhvi 123

Neerav Sundriyal 124

Prabhdeep Singh Virdi 215

Ankit Shah 217

Dishank Shah 218


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COMPANY BACKGROUND

Was founded in 1962

Produces nylon fiber yarn

Ms Pundir

Profitable firm

Seasonal production


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SUPPLY CHAIN SYSTEMS

SuppliersKOTA

FIBRESLTD.

Merchants EndUser

Mills

Polyester Pelletsand other RawMaterials

Spools ofYarn

Textiles

Sarisand

Textiles


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ISSUES SURFACED IN 2001 WITH KOTA FIBRES LTD.

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


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PUNDIRS ALTERNATIVES OF ACTION

Analyse the financial situation

Reject the offer for credit extention 80 days

The two proposals from the Transportation Manager and the

Purchasing Agent should be approved

Level Production Efficiency

0 Dividends for the year


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CASH CYCLE

A/P turnover = 17.919

Period = 6

Inventory turnover =

38.562

Period = 10

A/R turnover = 24.191

Period = 16Time

Inventory soldInventory Purchased

Cash Received

Cash paid forInventory

Operating cycle = 26

Cash cycle = 20


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Current Forecast32950666

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

0 2 4 6 8 10 12 14

Sales A/R INV A/P N to B


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9/49

Memo 1 - Pondicherry Pondicherry textile considering making kota fibers as

their prime yarn prime yarn supplier giving them thesales of 60 lakh rupees.

Pondicherry textile is asking for 80 days credit net.

Kota fibers current credit period is 45 days.


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Annual Income Statement Forecast

Current ForecastForecast After

considering Memo 1

Gross Sales 90900108 96900108

Exercise Tax 13635016 14535016

Net Sales 77265092 82365092

Cost of Goods 66993380 71415380

Gross Profit 10271712 10949712

Operating Expenses 5454006 5814006

Depreciation 1073731 1073731

Interest Expense 1835620 2078159

Profit Before Tax 1908355 1983815

Income Tax 572506 595145

Net Profit 1335848 1388671


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Ratio Analysis Recievable Turnover Ratio - 19.938

Recievable Turnover in Days - 19

Inventory Turnover Ratio - 28.790 Inventory Turnover in Days - 13

Payable Turnover Ratio - 58.538

Payable Turnover in Days - 7

Operating Cycle - 31

Cash Cycle - 25


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Looking at positive aspects

Looking at the proposal it looksgood as it is a profitable deal and

also will help company to expand

Also it will help in increasingsales upto 60 lakh.


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Current status of liquidity of the

companyCurrent ratio which must be around 2 comes out to be

1.2 and quick ratio which must be around 1 comes outto be 0.72 which states the company would not haveenough liquidity in meeting up short term obligations.

The company has already taken loan to keep the bank

balance of 7,50,000

The company also needs an urgent loan to payoff theexcise duty.


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Drawbacks The company would require another loan to start the

production.

Also one red-flag is the extended credit term of 80days net requested by Pondicherry Textiles.

This would reduce the amount of cash on hand duringthe year and increase their liabilities due to the 80 daycredit term.


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36870938

0

5000000

10000000

15000000

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35000000

40000000

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SuggestionI would suggest that the company must not go for this deal as theycannot afford to go for another loan at this moment and also the creditperiod is very high and would reduce the amount of cash in handincreasing the liability.

However they can try to arrange the funds from other sources like:-

1 Ms.Pundir must cut down the dividend as the rate of dividend given istoo high to the shareholders hence a huge amount of cash of around 20lakh is drawn annually which must be reduced to an extent or shouldbe stopped for a year.

2. If the members do not agree for stopping the dividends then they musttry to arrange some capital from their side so that they can use it for theexpansion in Pondicherry.

3. Dissolve the cash balance of 7.50 lakh.


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Conclusion In this circumstance, Kota Fibers should not accept this

memo as it will have an unfavorable effect on the business.

Having less cash on hand, tied up in receivables, will not

allow Kota Fibers to be able to pay off the All-India bankbefore December.

Hence overall its a good proposal from the point of view ofincreasing the sales and beneficial from the short termperspective but not good for the future financial stability ofthe company as it would lead to increase the borrowings ofthe company.


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Memo 2: Inventory Reduction


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Reduce inventory through better

transportation managementThe first alternative involves a proposal from the

transportation manager who suggests that since

shipments in the last 6 months have been on time dueto the new road between Kota and New Dehli, Kotacan reduce its raw material inventory requirementfrom 60 to 30 days, which would reduce the companys

inventory by one month.


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considering Memo 2

Gross Sales 90900108 90900108

Exercise Tax 13635016 13635016

Net Sales 77265092 77265092

Cost of Goods 66993380 66993380

Gross Profit 10271712 10271712





Income Tax 572506 726000

Net Profit 1335848 1694000


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The New Inventory PolicyReducing raw-material inventory by 30 days will reduce

peak debt, respectively and will also increase theprofitability of the firm by . But company should beaware of the dangers of reducing inventory (e.g., stock-outs), a reduction from 60 to 30 days(In Such case theyshould be , although significant, still leaves a goodmargin of safety.

To adjust the spreadsheet, simply change the purchasingfrom two months ahead to one month ahead. Inaddition, wages will have to be changed to be driven bythe same months purchases rather than last months

purchases.


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Impact of the proposal on

financials of KotaThe proposal will have a good impact on Kotas short-term

debt position as reduced amount of inventory will reduce

the debt outstanding in all the months from January toDecember .

The proposal will also reduce the monthly borrowingrequirement in most months from January to December

The decrease in borrowing requirement and debtoutstanding makes sense as the proposal reduces inventoryrequirements to half, which means that the amount offinancing required for current assets is lesser


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SuggestionI would suggest that the company must go for this

proposal as they can increase liquidity by decreasingthe inventory period from 60 to 30 days.

The firm should move towards inventory reductioncutting down the cash cycle and increase its liquidity.

This will tie up less cash in inventory that is sitting inthe warehouse.

From these plans, company does not have to purchasemore inventory in the first two months since it will useraw material on hand and order accordingly.


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Balance Sheets Forecasts


considering Memo 2

Cash 750000 750000

Accounts Recievable 3715152 3715152

Inventories 2225372 1986761

Total Current Assets 6690525 6451914

Gross PP&E 11495646 11495646

Accumulated Depreciation 2558009 2558009

NET PP&E 8937637 8937637

Total Assets 15628162 15389551

Accounts Payable 1157298 1039007

Notes to Bank (Deposits at Bank) 3463707 3180390

Accrued Taxes -180654 -180654

Total Current Liabilities 4440351 4038743

Owners Equity 11187810 11187810

Total Liabilities and Equity 15628161 15226553


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22800693

0

5000000

10000000

15000000

20000000

25000000

30000000

0 2 4 6 8 10 12 14Sales A/R INV A/P N to B


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Cash Cycle - 19


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Memo 3 -Proposal by Hibachi

Chemicals Hibachi Chemicals plant which are the suppliers of

polyester pellets is located 20 km away from Kotafibres.

Polyester pellets accounts for 35% of the raw materialspurchases made by Kota fibres.

Supplying of pellets by Hibachi chemicals on the basisofjust-in-time strategy .


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Just-in-TimeJust-in-Time (JIT) is a production strategy that

strives to improve a business return oninvestment by reducing in process inventory andassociated carrying costs.

JIT focuses on continuous improvement and canimprove a manufacturing organization's return on

investment, quality, and efficiency. It saves warehouse space and costs.


29/49

Analysis of Inventory

If the Kota fibre plans to make a deal with the HibachiChemicals then following will be the forecast for the

year 2001. Presently the purchasing of inventory has to be done

two months before .

Therefore the purchasing of the inventory for the

month January and February had been done alreadyin the month of November and December


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The inventory cost of pellets accounts for Rs 2500000

for the month of March and April .If Just-in Timegets implemented then there is no need to invest in

pellets for the month of March and April.

Therefore the firm has increase in the cash assest of

Rs 2500000.

The amount will help the Kota fibres to solve theproblem of shortage of cash on hand.


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considering Memo 3

Gross Sales 90900108 90900108

Exercise Tax 13635016 13635016

Net Sales 77265092 77265092

Cost of Goods 66993380 66993380

Gross Profit 10271712 10271712





Income Tax 572506 650518

Net Profit 1335848 1517875

The net profit margin increases to 0.016 which is higher than that of without the

implementation of JIT


32/49

Looking at positive aspects of just

in-time strategy

Increase in the current ratio of firm to 1.53 ascompared to 1.50 which was without theimplementation of JIT.(Current assets/Currentliablities)

The increase in the current ratio shows that kotafibres ability to meet its short term obligations.


33/49

Cont.A reduction in raw material inventory and finished

goods inventory on hand will result in less inventorybeing accounted for in the financial statements and

increase the amount of overall liquidity sinceInventory is the least liquid asset.


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26432973

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Cash Cycle - 20


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considering Memo 4

Gross Sales 90900108 90900108

Exercise Tax 13635016 13635016

Net Sales 77265092 77265092

Cost of Goods 66993380 66216184

Gross Profit 10271712 11048908


Depreciation 1073731 1073731Interest Expense 1835620 2316124


Income Tax 572506 661514

Net Profit 1335848 1543533


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Cash Cycle - 62


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30335673

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Actions Leading To Positive Results1. Implementation of Memo by Transport Manager for

Inventory Reduction

2. Implementation of Memo by Purchasing Agent forJIT Procurement of Pellets

3. Not Granting Dividends till all Outstanding debtsare settled

4. Asking Shareholders to invest


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CurrentForecast

InventoryReduction +

JIT

InventoryReduction +

JIT + NoDividends

InventoryReductions +

JIT + NoDividends +Investments

Gross Sales 90900108 90900108 90900108 90900108

Exercise Tax 13635016 13635016 13635016 13635016

Net Sales 77265092 77265092 77265092 77265092

Cost of Goods 66993380 66993380 66993380 66993380

Gross Profit 10271712 10271712 10271712 10271712

Operating Expenses 5454006 5454006 5454006 5454006

Depreciation 1073731 1073731 1073731 1073731

Interest Expense 1835620 1095239 968895 943626

Profit Before Tax 1908355 2648736 2775080 2800348

Income Tax 572506 794621 832524 840105

Net Profit 1335848 1854115 1942556 1960244


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Balance Sheets Forecasts

CurrentForecast

InventoryReduction + JIT

InventoryReduction + JIT +

No Dividends

InventoryReductions + JIT +No Dividends +

Investments

Cash 750000 750000 750000 750000

Accounts Recievable 3715152 3715152 3715152 3715152

Inventories 2225372 1721982 1721982 1721982

Total Current Assets 6690525 6187134 6187134 6187134

Gross PP&E 11495646 11495646 11495646 11495646

Accumulated Depreciation 2558009 2558009 2558009 2558009

NET PP&E 8937637 8937637 8937637 8937637

Total Assets 15628162 15124771 15124771 15124771

Accounts Payable 1157298 916980 916980 916980Notes to Bank (Deposits at

Bank)3463707 2549491 423147 -2122

Accrued Taxes -180654 -180654 -180654 -180654

Total Current Liabilities 4440351 3285817 1159473 734204

Owners Equity 11187810 11187810 13187810 13587810

Total Liabilities and Equity 15628161 14473627 14347283 14322015


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Result After Inventory Reduction & JIT Implementation

18788696

0

5000000

10000000

15000000

20000000

25000000

30000000

0 2 4 6 8 10 12 14



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Result After Inventory Reduction, JIT Implementation & No Dividends

to Stock Holders

18788696

0

5000000

10000000

15000000

20000000

25000000

30000000

0 2 4 6 8 10 12 14



45/49

Result After Inventory Reduction, JIT Implementation, No Dividends

and Investments from Stock Holders

18904448

0

5000000

10000000

15000000

20000000

25000000

30000000

0 2 4 6 8 10 12 14



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Links To Excel Sheets Initial Forecast

Memo 1 (Pondicherry Customer)

Memo 2 (Inventory Reduction to 30 Days) Memo 3 (JIT Purchases of Pellets)

Memo 4 (Level Annual Production)

Solution 1:Inventory + JIT

Solution 2:Inventory + JIT + No Dividends

Solution 3: Inventory + JIT + No Dividends +Investments from Stockholders
http://base%20cf.xlsm/http://pndicherry%20memo.xlsm/http://inventry%20reduction%20from%2060%20to%2030%20days.xlsm/http://pellet%20case.xlsm/http://level%20annual%20production.xlsm/http://combination%20of%20inventry%20red%20%26%20jit.xlsm/http://combination%20of%20inventry%20red%20+%20jit%20+%20no%20dividends.xlsm/http://combination%20of%20inventry%20red%20+%20jit%20+%20no%20dividends%20+%20investments.xlsm/http://combination%20of%20inventry%20red%20+%20jit%20+%20no%20dividends%20+%20investments.xlsm/http://combination%20of%20inventry%20red%20+%20jit%20+%20no%20dividends%20+%20investments.xlsm/http://combination%20of%20inventry%20red%20+%20jit%20+%20no%20dividends%20+%20investments.xlsm/http://combination%20of%20inventry%20red%20+%20jit%20+%20no%20dividends.xlsm/http://combination%20of%20inventry%20red%20%26%20jit.xlsm/http://level%20annual%20production.xlsm/http://pellet%20case.xlsm/http://inventry%20reduction%20from%2060%20to%2030%20days.xlsm/http://pndicherry%20memo.xlsm/http://base%20cf.xlsm/

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