Kota Fibres, Ltd

Abstract

In January 2001, the chief executive of this small yarn-production company in India must resolve a surprising cash shortage. The task for the student is to evaluate the causes of this shortage (using a completed "base-case" forecast given in the case) and assess the usefulness of various possible remedies suggested by managers in the company. In essence, the company is unable to liquidate a seasonal working-capital loan for the requisite 30 days each year. This difficulty arises from two classic causes: (1) secular growth of the company and (2) declining profitability. Possible remedies include reducing inventory through more efficient transportation and warehousing, reducing credit terms to customers, being supplied raw materials on a just-in-time raw materials, switching from seasonal to level production, improving profitability, decreasing dividends, and reducing sales growth. The objectives of the case are threefold: (1) To explore a range of issues in working capital management with a primary focus on accounts receivable and inventory. (2) To extend students' skills in financial-statement modeling and analysis. This case demonstrates the technique of forecasting with T-accounts, which may be contrasted with percent-of-sales forecasting illustrated in other cases. (3) To illustrate some of the challenges in financial (and general) management of firms in developing countries. These challenges include transportation and logistical problems, the availability of credit to merchants and consumers, high real rates of growth, tax practices of governments, and dramatic swings in demand induced by local customs and holidays.

Excerpt

UVA-F-1359

KOTA FIBRES, LTD.

Ms. Pundir, the managing director and principal owner of Kota Fibres, Ltd., discovered the problem when she arrived at the parking lot of the company's plant one morning in early January 2001. 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 Pundir to fill their orders in a timely manner. 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. Mehta, 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.

This shipment would not leave for at least another two days, and angry customers would no doubt require an explanation. 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 Pundir for the next day to discuss Kota's financial condition and its plans for restoring the firm's liquidity.

Pundir told Mehta, “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.”

Company Background

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Keywords: cash flow, forecasting, inventory management