What financial policies and/or organizational changes should Ms.

Pundir
implement to improve Kota Fibres liquidity to obtain the credit from All-India
bank and finance the working capital requirements of its 2001 operations?
3. ANALYSIS
3.1 Market Conditions
The synthetic textile industry is steadily growing as the demand for saris
(traditional Indian dresses) continue to rise due to increasing female
population and general income. Seasonal fluctuations in sales are notable, but
easy to forecast since sales peak in May to July because of the increase in
demand for saris due to the anticipated Diwali celebration in mid-autumn.
Except for August, sales levels are relatively the same on the other months.
Since Kota Fibres is an almost 30-year old company who has built steady
business relationships with small, local textile weavers, Kota has a viable force
in the market. However, the yarn supply business where Kota Fibres competes
is characterized by its reliance to responsive service and credit terms with its
customers, making its production and delivery systems and credit policy very
important factors in sales performance. Its relationship with its customers is in
danger of falling apart due to failure in delivery times. Also, its credit policy
may also be subject to scrutiny since it has a direct effect on liquidity.
3.2 Management of Inventory and Accounts Receivables

Pundirs 2001 forecast reveal that the inventory levels of the company is too
high, as it begins with the amount of 2,308,135 in January and quickly grows
to 11,855,841 in March. The highest amount of inventory is in May with its
levels at a peak of 19,666,227. The surge in inventory is due to the increase in
purchase of raw materials due to the expected increase in sales during
summer through autumn in preparation for seasonal festivities. To prepare for
the sales growth, Kota Fibres needs to purchase the raw materials using debt
from the bank. However, much of the firms cash is tied up with its accounts
receivables. The company is not managing its accounts receivables very well
as evidenced by its Days Sales Outstanding ratios. Kota Fibres maintains a 45day credit term for its customers. The company is well within control of its
receivables from January 2001 through April 2001; but as May enters, we can
observe that the average collection period is starting to exceed the threshold
of 45 days. In August 2001, DSO is at its height at 71 days.
3.3 Financial Ratios, 2000 and 2001
The companys financial ratios provide insight into the companys current
conditions. One of the more pressing matters is the companys liquidity. While
the companys current ratio was 3.24 in 2000, the figure declined to 1.51 in
2001. Subsequently, the companys quick ratio also declined from 2.38 to
1.01. This decrease in the companys liquidity ratios in the forecasted
statements is an indicator that the firm may have issues in satisfying their
short-term obligations.

There is a significant increase in the companys debt ratio from 0.11 in 2000
to 0.28 in 2001. Although debt could support the development of the
company toward growth and expansion, it appears that Kota Fibres liabilities
are mainly to finance short term obligations, including the loans to settle their
excise tax.
3.4 Increasing Costs
While the companys revenues increased from 75.8 Million in 2000 to 90.9
Million in 2001, net profit decreased from 2.5 Million to 1.3 Million. The
decrease in profit is mainly due to the increase in COGS, which may indicate
that Kota is not managing its costs efficiently. This is further supported by the
decrease in gross profit and net profit margins.
Growth is evident from the quarterly capital expenditures of the company
substantiated by the increase in PPE and inventory. Consequently, the
increase in assets will also increase operating costs. Moreover, the company
distributes 500,000 worth of dividends quarterly amounting to 2 Million in
2001. Considering the companys issues with liquidity, Kota Fibre should try to
find ways to control their costs and should also consider reducing their payout
ratio.
3.5 Credit Line
The upsurge of inventory and accounts receivables during summer until
autumn makes it necessary for the company to take on debt. The forecasted
2001 statements reveal that the firm will need a huge amount of debt as

much as 32 Million in June 2001. While the surge in sales is immense during
the first half of the year, revenues begin to decline starting July 2001.
Consequently, profits also decrease; and the profits from the peak summer
months are not enough to pay the bank in full by October. In fact, the
company will still have a debt with the bank of 5 Million. Thus, Pundirs
forecast will not be accepted and the companys credit line will not be
extended by the bank.
Pundir needs to implement new financial policies and strategies to ensure that
the company is liquid enough to pay its short term obligations. The current
system of Kota Fibres is inefficient, as they prepay their suppliers but provide
long credit periods to customers. Ms. Pundir should consider her managers
proposals, which will improve its arrangements with suppliers and customers,
and could possibly solve its liquidity problem.