Sengupta Fibres, Ltd

Abstract

In January 1990, the chief executive of this small yarn-production company must resolve a surprising cash shortage. The tasks for the student are to evaluate the causes of this shortage (using a complete base case forecast given in the case) and then to assess the usefulness of various possible remedies suggested by company managers. In essence, the company is unable to liquidate a seasonal working-capital loan for the requisite 30 days each year. This situation arises from two classic causes: secular growth of the company, and declining profitability. Possible remedies include reducing finished-goods inventory through more efficient transportation and warehousing, reducing credit terms to customers, just-in-time (JIT) raw-materials supply, and switching from seasonal to level production. This case provides a thorough exercise of working-capital analysis and concepts.

Excerpt

UVA-F-0935

Rev. Jul. 3, 2012

SENGUPTA FIBRES, LTD.

Mrs. Sharma, the managing director and principal owner of Sengupta Fibres, Ltd., discovered the problem when she arrived at the parking lot of the company's plant at 10:00 a.m. one morning in early January 1990. Trucks filled with rolls of fiber yarns were being unloaded, but they had been loaded just the night before and had been ready to depart that morning. The fiber was intended for customers who had been badgering Mrs. Sharma to fill their orders in a timely fashion. The government tax inspector, who was stationed at the company's warehouse, would not clear the trucks for departure because the excise tax had not been paid. The tax inspector required a cash payment, but in seeking to draw funds for the excise tax that morning, Mr. Ashoka, the bookkeeper, discovered that the company had overdrawn its bank account again—the third time in as many weeks. The truck drivers were independent contractors who refused to wait while the company and government settled their accounts. They cursed loudly as they unloaded the trucks.

Now this shipment would not leave for at least another two days, and angry customers would no doubt require an explanation. Moreover, before granting a loan with which to pay the excise tax, the branch manager of the All-India Bank & Trust Company had requested a meeting with Mrs. Sharma for the next day to discuss Sengupta's financial condition and plans for restoring the firm's liquidity.

Mrs. Sharma told Mr. Ashoka, “This cash problem is most vexing. I don't understand it. We're a very profitable enterprise, yet we seem to have to depend increasingly on the bank. Why do we need more loans just as our heavy selling season begins? We can't repeat this blunder.”

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Keywords: banking, loan evaluation, financial-statement analysis, forecasting, inventory management, diverse protagonist, female, seasonality, international case, diversity case, derivatives, diversity, international