Kota Fibres Case
Table of Contents Executive Summary………………………………. Page 2 External Analysis…………………………………. Page 3 Internal Analysis………………………………….
. Page 3 Financial Analysis…………………………………Page 4 Recommendation and Conclusion………….. ……Page 4 Executive Summary Kota Fibres is a single nylon manufacturing plant in Kota India managed and owed by Ms. Pundir.
The company produces synthetic fiber yarns that are used to make colorful cloth used in creating saris. The need for saris’ is very seasonal and as such the demand for synthetic fibers mirrors this seasonality.Because of these peak seasons, the need for various financial structures throughout the year is present. The synthetic textile industry is currently stable within India with seasonal fluctuations. Currently the industry is experiencing a growth in demand of about 15% per year. Kota Fibres is currently growing sales at a rate of 18%; this is a great sign of the strength of the company as a competitor within the industry.
However there are several issues that Kota Fibres is currently facing. •Liquidity Issues •Shareholder Dividend Issues Asset Turnover Rates •Payment Periods These concerns will be addressed within the body of this analysis. The understanding of the memos that Ms. Pundir has received provide more insight into the future operations of Kota Fibres and some present favorable results. External Analysis The external analysis for Kota Fibres is very positive with stable and predictable demand featuring a unit demand increase of 15%.
The demand has increased due to both population and national income increases. The demand for synthetic yarn peaks during the mid-summer months.Kota Fibres is a synthetic yarn manufacturer, selling their product to local mills who in turn sold to merchants and retailers who finally sold to the end consumer. The supply chain system of the yarn industry starts with consumers who purchase their Saris from local cloth merchants (who maintain low levels of inventory) who may offer credit in order to boost sales. Textile mills often supply materials on credit to the merchants due merchant sale tactics.
Finally yarn manufacturers supply credit to their textile mills. It is important to note that the yarn manufacturers like Kota Fibres do not receive any credit from their suppliers.It is within this hierarchy structure that Kota Fibres operates and as a result Kota Fibres should remain mindful of the industry as a whole because they rely heavily on the downstream activities. The memo from the transportation manager provides a more positive outlook on Kota Fibres future operations. The memo details that the new road has drastically improved supply shipments. This thereby reduces the raw inventory requirement from 60 days to just 30.
This decreases the amount of inventory costs and increases the amount of cash on hand that the firm will have.Internal Analysis Kota Fibres’ liquidity issues are creating problems when paying the excise tax needed in order to move their product. In addition to the cash shortages, Kota Fibres is not paying creditors on time or in the correct amounts this is creating a huge financial strain on the organization and this issue needs to be addressed. Ms. Pundir is currently paying high dividends to the companies stakeholders; this is a huge concern to the company’s overall profitability.
Currently more emphasis is being placed on the payment of dividends than the payment to creditors.Currently the organization has uneven levels of production. This creates uneven demand for labour and as a result layoffs and firings often take place during low demand seasons. The volatile production levels create inefficiencies such as; machinery breakdowns and maintenance, training costs and lackluster workforce cohesion. In addition to uneven levels of production Kota Fibres is not active in reducing costs of production which is currently contributing to the slim profit margins the company is currently facing. Financial Analysis Liquidity ratio’s for Kota Fibres are 3.
for 200 which is in line with the industry and is seen as an acceptable level of liquidity. However when forecasting for 2001 the liquidity ratio drops to 1. 5 which may cause future problems for the company when it is time to pay excise taxes and other related fees. Cost of Goods Sold for 2000 was 53,865,911 rupees and inventory was 1,249,185 rupees which resulted in and inventory turnover of 43. 12 or 8. 4 (9)days.
This was an increase from the previous year and shows the more efficient production as noted within the memo provided in the exhibits.This is a positive note for Kota Fibres as it is increasing the amount of inventory turnover. Net sales for 2000 was 64,487,385 rupees and accounts receivable was 2,672,729 which resulted in a receivables turnover rate of 24. 12 or 15. 1(16) days. The current receivable turnover rate should be carefully considered as it reduces the efficiency of the organization by reducing cash flows and increasing liabilities.
Total supplier purchases for 2000 was 42,419,371 rupees and accounts payable was 759,535 rupees resulting in a payable turnover ratio of 55. 5 or 6 days. The combination of this data resulted in a cash cycle of 19 days. The debt to asset ratio for Kota Fibres is relatively low in 2000 with a ratio of 11% this shows a low amount of leverage that the company is currently using. Recommendation and Conclusion Currently Kota Fibres is facing a cash shortage which it desperately needs to resolve quickly in order to pay bills, excise taxes and overdue loans.
Ms. Pundir should also refocus the shareholder dividend structure as this is a huge detriment to the organizations cash on hand.Ms. Pundir should illustrate the added value that the shareholders would gain in the long run by reinvesting such large dividends back into Kota Fibres. As mentioned earlier the memos that Ms.
Pundir has received present possible opportunities for the organization and as such my recommendations are as follows. The offer by Pondicherry Textiles should be rejected as the 80 day credit term would have a negative impact on Kota Fibres cash on hand as well as increase the company’s liabilities as mentioned before.The proposal offered by the purchasing agent should be accepted as one reduces the amount of inventory thereby increasing the amount of cash on hand for the organization. The proposal offered by the operations manager should be accepted as it increases the overall efficiency of production and creates a more positive working environment reducing training costs and further adding to the bottom line of the organization. If Kota Fibres implements the above stated recommendations and communicated them to the shareholders, the future of the organization looks much more promising and resultantly much more profitable.