KOTA

FIBRES SG-1
Arvin Reinaldo (29320079)
Jovan Nathaniel (29320143)
Dhavina Durra (29320131))
Ruth Marganda (29320146)
 How did Mehta construct his financial

01 forecast? Using the financial forecast,

prepare to show the “cash cycle” of the
firm (i.e., the flow of funds through the
working-capital accounts of the firm).
Interpretation of the Financial Forecast

● Although Kota Fibres suffer cash shortage, is still enjoy profit

● The forecasted profit of INR 1.335.848 in the year 2001 (1% of the forecasted gross sales)
is far below than the profit of INR 2.550.837 in the year 2000 ( 3% of the gross sales for that
year)

● The monthly forecast only show that the business will only have profit in the 5 months during
the peak season

● From 2000-2001 there is a significant increase of account receivable and inventory. Total
asset increase from 35%-> 43% as forecasted in 2001
● To maintain cash balance of INR 75000, Kota Fibres needs to borrow 32452209 whereas
the repayment would only be INR 29672610, that signs the company will not be able to pay
its short term liabilities.
Current ratio and quick ratio decrease in 2001 that imply the firms ability to pay short term debt declines

Low turnover rate in 2001 indicating firm have high inventory

Average collection period is not very large, which is good and their average payment period is very low
which means that they are fast in paying their bills

From the debt ratio, Kota have almost triple compared to last year

Kota is likely to have a high rating from their supplier because they have a low average payment period
Forecast Assumption

The forecast is created from past

practices and based on discussions
among Pundir and Mehta.

For example: account receivable

forecast is created from the past
month of 2001 assuming the similar
thing will happen in the future
Cash Cycle

● Cash is tied up with the company asset for 23.36 days, which had a huge
increase from year 2000 of only 18.44 days

● Shortening the cash cycle is key for Kota Fibres as they have a more flexible
cash flow especially to solve their cash shortage problem.
 Examine the exhibits in the case. Based

02 on Mehta’s forecast, how much debt

will Kota need to arrange for the
coming year? Will Kota be able to repay
the line of credit this year?
Based on Exhibit 8, in the Notes Payable in monthly forecast,
we could see that the debt outstanding balance on January is
INR 1,146,268 and the maximum loan amount required by Kota
is during the month of June is INR 32,950,665 and the debt
outstanding for the end of the year 2001 is INR 3,463,701.
April, May and June have the highest amount of borrowings, which are, sequentially, INR
8,652,349, INR 9,578,178 and INR 5,953,108. In spite of the fact that through July to November
shows repayments, in December, it stills shows a borrowing of INR 185,647 and the net borrowing
amount* for the year 2001 is INR 2,779,599. Thus, this that the forecasts prepared by Mehta show
that Kota Fibres Ltd. will not be able to repay the line of credit this year and rather they further
require credit form the bank.

In this way, eventhough the company is beneficial, they endure from cash crunches amid their top
seasons as can be seen from the sharp increment of obligation exceptional amid the summer
months, May, June and July.

*We could find the net borrowing amount for the year 2001 by adding all net borrowing
value given in Exhibit 9.
 Why do Kota’s financial

03 requirements vary across the year?

What are the key determinants of
Kota’s borrowing needs?
The borrowing needs of Kota Fibres vary each
month due to the difference of cash cycle
where the cash cycle keeps increasing each
month and reach its peak at August and
September until it starts to decrease again
until the early next year.

The longer the cash cycle , Kota Fibres will need

more external financing support especially due
to the fact that they already have a cash
shortage problem.
 (1) Pondicherry Textile’s request for credit: What will be
this proposal’s effects on accounts receivable and debt
balances across the year? (2) The level-production
proposal: If Kota undertakes level production now, at the

04
low point of the annual business cycle, what is the
likelihood of inventory stock-outs at the peak of the
business cycle? (3) If Kota undertakes level production
just after the peak, what will happen to inventory and
debt balances at the cyclical low? Are those proposals
liable to relieve, or worsen, Kota’s ability to “clean up” its
bank loan by the end of 2001? What action should Pundir
take on these two proposals?
Kota’s problem is about cash management and this proposal from Pondicherry will give
impact on the firm’s short-term debt and cash position. For example, Accepting this
proposal will require Kota to constantly borrow more in all months so that its highest debt
(in the month of july) will increase from Rs. 32 million to Rs. 35 million.
The level-production proposal: If Kota implements level production and inventory stock-outs
at the height of the business cycle, profits will decline and debt will become unpayable. The
inventory will not be overloaded if Kota begins level production shortly after the peak.

Kota will reduce production costs and use the savings to pay off debt. If we consider these
two memos, we believe they are the most significant to relive to support Kota’s ability to
“clean up” its bank loan by the end of 2001 it the level-production proposal.Mr. Pundir is
recommended to take the level-production proposal by undertakes level production just
after the peak.

The bank needs a 30-day “clean up” of the loan to ensure that money borrowed under a
line-of-credit (short-term loans) does not become a long-term loan and that the borrower
will repay the loan in full by the due date. Every year, at least 30 days of the seasonal line of
credit had to be cleaned up (the usual clean up month had been October in this case). Yes,
the bank can continue to waive compliance with this covenant to keep the loan alive.
 Identify the three most important

05 actions or policies that Pundir

should take. What should she say to
the bank? To the customers?
Important actions that Pundir should take is:

1. 30 day inventory policy and partial JIT to prevent inventory overload and free up a lot of
space in the warehoues
2. Level production - undertakes the level production just after the peak
3. Zero dividends in 2001 - split off strategy / increase share holders stock strategy

To Bank:
plan to obtain the long term and fixed rate loans from the bank in order to align Kota’s
capital expenditure with long term debt

To Customers:
give discount to attract customer pay faster