 Implication of the decision (Ex-3) -

Reducing the raw-material inventory requirement from 60 days to 30 days can have several
implications:

1. Positive Cash Flow Impact: By reducing the amount of inventory held, there will likely be a
positive impact on cash flow. This is because capital that was tied up in inventory can now be
allocated to other areas of the business.

2. Lower Holding Costs: With less inventory, there will be lower costs associated with warehousing,
insurance, and potentially lower levels of obsolescence or spoilage.

3. Increased Warehouse Space: The reduction in inventory will free up warehouse space, which can
be repurposed for other activities or potentially reduce the need for additional warehouse space.

4. Reduced Risk of Obsolescence: With a shorter inventory turnover period, there is a reduced risk
of holding onto obsolete or outdated materials.

5. Increased Dependency on Suppliers: Depending on the reliability of suppliers, a shorter inventory

period might mean that the company is more reliant on timely deliveries. Any disruptions in the
supply chain could potentially have a more immediate impact. And more stock-out risk.

6. Potential for Stockouts: With a leaner inventory, there's a higher risk of stockouts if there are
unexpected spikes in demand or supply chain disruptions.

7. Smoother Inventory Management: With a shorter inventory period, tracking and managing
inventory levels can become more streamlined and require less effort.

8. Potential for Cost Savings: If there are carrying costs associated with holding inventory, reducing
inventory levels can lead to cost savings.

9. Impact on Production Scheduling: Production schedules may need to be adjusted to align with the
new inventory levels. This might require closer coordination with the production team and suppliers.

10. Potential for JIT (Just-in-Time) Operations: With a 30-day inventory requirement, the company
may move closer to a just-in-time inventory management system, which can further improve
efficiency and reduce holding costs.

It's important to thoroughly evaluate these implications and ensure that all relevant stakeholders
are informed and aligned with this decision. Additionally, maintaining open communication with
suppliers and having contingency plans in place for potential disruptions is advisable.

Analysis of Notes Payable Using Exhibit 5:

1. Notes Payable Trend: Looking at the monthly data, we observe that the Notes Payable amount
varies significantly. It ranges from INR 8.0 million in January 2012 to INR 345.4 million in June 2012.
This indicates that Guna Fibres frequently takes on short-term debt.

2. Seasonal Variations: There is a clear seasonal pattern in Notes Payable. The amount tends to
increase in the months leading up to the peak selling season (around April to June), which aligns with
the demand for saris and textiles during festivals.
3. Cash Flow Management: The use of Notes Payable suggests that Guna Fibres may be using short-
term borrowing to manage its cash flow. This can be a common practice for businesses with seasonal
fluctuations in revenue.

4. Interest Expense Impact: Notes Payable typically incur interest expenses. This cost can impact
Guna Fibres' profitability, especially during months when the amount of Notes Payable is high.

5. Liquidity and Solvency: The level of Notes Payable in relation to the company's total assets and
equity should be monitored. A high level of short-term debt relative to equity could indicate higher
financial risk.

6. Potential Risk: Depending on the terms of the notes, rapid increases in Notes Payable may pose a
risk to the financial stability of the company. It's important to ensure that the company can meet its
debt obligations.

7. Refinancing or Repayment: Guna Fibres should have a strategy for managing its Notes Payable.
This could involve refinancing at more favorable terms, paying down debt with excess cash flow, or
negotiating with creditors if needed.

8. Impact on Financial Ratios: The presence of Notes Payable will affect various financial ratios,
including the current ratio (which measures short-term liquidity) and the debt-to-equity ratio (which
indicates the level of financial leverage).

10. Interest Rate Sensitivity: If the interest rates on the notes are variable, Guna Fibres may be
exposed to interest rate risk. Rising interest rates could lead to higher interest expenses in the
future.

In summary, Notes Payable can be a useful financial tool for managing short-term cash flow needs,
especially in a business with seasonal revenue patterns. However, it's important to carefully monitor
and manage this debt to ensure it remains at a manageable level and doesn't pose a risk to the
company's financial health.