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CASE 9

Kota Fibres, Ltd.

Mrs. 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 yams were being unloaded, but they had been
loaded just the night before and had been ready to depart that morning. The fiber was in-
tended for customers who had been badgering Mrs. Pundir 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 morn-
ing, Mr. Mehta, the bookkeeper, discovered that the company had overdrawn its bank ac-
count again-the third time in as many weeks. The truck drivers were independent con-
tractors 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. Pundir for the next day to discuss Kota's financial condition and plans
for restoring the firm's liquidity.
Mrs. Pundir told Mr. 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."

This case was written by ThienT. Pharn under the direction of Professor Robert F.Bruner as a basis for class dis-
cussion rather than to illustrate effective or ineffective handling of an administrative situation. The financial sup-
port of the Batten Institute is gratefully acknowledged. Copyright O 2001 by the University of Virginia Darden
School Foundation, Charlottesville.VA. All nghts reserved. To order copies, send an e-mail to dardencases@vir-
ginia.edu. No p a n of this publicarion may be repmdrrced stored in a mrieval syszem, used in a spreadsheer, or
~ r m m i r f e din any form or by any means--electronic, r~rechartical,photocopying. recording, or othcnvise-with-
oul rhe permission of the Darden School Foundation. Version 1.1.
Production and Distribution System 117 .

COMPANY BACKGROUND
Kota Fibres, Ltd., was founded in 1962 to produce nylon fiber at its only plant in Kota, In-
dia, about 100 kilometers south of New Delhi. By using new technology and domestic raw
materials, the firm had developed a steady franchise among dozens of small local textile
weavers. It supplied synthetic fiber yarns used in weaving colorful cloths for making saris,
the traditional women's dress of India. On average, each sari required eight yards of cloth.
An Indian woman typically would buy three saris a year. With India's female population at
around 500 million, the demand for saris would account for more than 12 billion yards of
fabric. This demand was currently being supplied entirely from domestic textile mills that,
in turn, filled their yarn requirements from suppliel-ssuch as Kota Fibres.

SYNTHETIC-TEXTILE MARKET
The demand for synthetic textiles was characterized by stable year-to-year growth and pre-
dictable seasonal fluctuations. increased with both population and national in-
come. In addition, India's pop rated hundEds of festivals each year, in defer-
ence to a host of deities, at whic traditionally worn. The most important festival,
the Diwali celebration in mid-autumn, caused a seasonal peak in the demand for new saris,
which in turn caused a seasonal peak in demand for nylon textiles in late summer and early
fall. Thus, the seasonal demand for nylon yarn would peak in midsummer. Unit growth in
the industry was expected to be 15 percent per year.
Consumers purchased saris an& teatiles from clo& merchants located in villages
around the country. A cloth merchant was an important local figure usually well known to
area residents; the merchant generally granted credit to support consumer purchases. Mer-
chants maintained relatively low levels of inventory and built stocks of goods only shortly
in advance of and during the peak selling season.
Competition among suppliers (the many small textile-weaving mills) to these merchants
was keen and was affected by price, service, and credit that the mills could grant to the mer-
chants. The mills essentially produced to order, building their inventories of woven cloth
shortly in advance of the peak selling season and keeping only maintenance stocks at other
times of the year.
The yarn manufacturers competed for the business of the mills through responsive ser-
vice and credit. The suppliers to the yarn manufacturers provided little or no trade credit.
Being near the origin of the textile chain in India, the yarn manufacturers essentially banked
the downstream activities of the industry.

PRODUCTION AND DISTRIBUTION SYSTEM


Thin profit margins had prompted Mrs. Pundir to adopt policies against overproduction and
overstocking, which would require Kota to carry inventories through the slack selling season.
1 18 Case 9: Kota Fibres. Ltd.

She had adopted a plan of seasonal production, which meant that the yarn plant would operate
at peak capacity for two months of the year and at modest levelrthe rest of the year. This pa&.
icy imposed an annual ritual of hirings and layoffs.
To help ensure prompt service, Kota Fibres maintained two distribution warehouses,
but getting the finished yarn quickly from the factory in Kota to the customers was a chal-
lenge. The roads were narrow and mostly in poor repair. A truck could take 10 to 15 days
to negotiate the trip between Calcutta and Kota, a distance of about 1,100km. Except when
they passed through cities, highways had only one lane. When two cars or trucks met, they
had to slow down and squeeze past each other or else stop and wait for the traffic to pass.
Journeys were slow and dangerous, and accidents frequent.

COMPANY PERFORMANCE
Kota Fibres had been consistently profitable. Moreover, sales had grown at an annual rate
of 18 percent in 2000. Gross sales were projected to reach 90.9 million rupees (Rs) in the
fiscal year ended December 31,2001 (see Exhibit I).' Net profits reached Rs2.6 million in
2000. Exhibits 2 and 3 present recent financial statements for the firm.

REASSESSMENT
After the episode in the parking lot, Mrs. Pundir and her bookkeeper went to her office to an-
alyze the situation. She pushed aside the several items on her desk to which she had intended
to devote the morning-a letter from a field sales manager requesting permission to grant fa-
vorable credit terms to a new customer (see Exhibit 4), a note from the transportation man-
ager regarding a possible change in the inventory policy (Exhibit s),a proposal from the pur-
chasing agent regarding the delivery lead times of certain supplies (Exhibit 6), and a
proposal from the operations manager for a scheme of level annual production (Exhibit 7).
To prepare a forecast on a business-as-usual basis, Mrs. Pundir and Mr. Mehta agreed
on various parameters. Cost of goods sold would run at 73.7 percent of gross sales-a fig-
ure that was up from recent years because of increasing price competition. Operating ex-
penses would be about 6 percent of sales-also up from recent years to include the addi-
tion of a qualiry-control department, rwo new sales agents, and three young nephews in
whom she hoped to build an allegiance to the Pundir family business. The company's in-
come ta;i rate was 30 percent and, although accrued monthly, was actually paid quarterly in
March, June, September, and December. The excise tax (at 15 percent of sales) was differ-
ent from the income tax and was collected at the factory gate as trucks left to make deliv-
eries to customers and the regional warehouses. Mrs. Pundir proposed to pay dividends of
Rs500,OOO per quarter to the 11 members of her extended family who held the entire equity

' t time, the


~ the rupee was pegged to the U.S. dollar at the rate of 46.5 rupees per dollar.
Financial Forecast 1 19

of the firm. For years Kota had paid high dividends. The Pundir farnily.believed that excess
funds left in the firm were at greater risk than if the funds were returned to shareholders.
Mr. Mehta observed that sales collecrions in any given month had been running steadily
at the rate of 40 percent of the last month's sales plus 60 percent of the sales from the month
before last. The value of raw materials purchased in any month represented on average 55 per-
cent of the value of sales expected to be made two months later. Wages and other expenses in
a given month were equivalent to about 34 percent of purchases in the previous month. As a
matter of policy, Mrs.Pundu wanted to see a cash balance of no less than Rs750,OOO.
Kota Fibres had a line of credit from All-India Bank & Trust Company. where it also
maintained its cash balances. All-India's short-term interest rate was currently 14.5 percent,
but Mr. Mehta was womed that inflation and interest rates might rise in the coming year. The
seasonal tine of credit had to be cleaned up for at least 30 days each year. The usual cleanup
month had been ~ctober: but Kota Fibres had faiIed to make a full repayment at that time.
Only after strong assurances by Mrs. Pundir that she would clean up the loan in November
or December had the bank lending officer reluctantly agreed to waive the cleanup require-
ment in October. Unfortunately, Kota Fibres' credit needs did not abate as rapidly as expected
in November and December, and although his protests increased each month, the lending of-
. ents with loans. Now he was refusing to extend any
k r itgreed to meet Kota's cash
more seasonal credit until Mrs. nted a reasonable financial plan for the company
that demonstrated its ability to loan by the end of 200 1.

FINANCIAL FORECAST
Mr. Mehta hurriedly developed a monthly forecast of financial statements using the current
operating assumptions (see Exhibit 8). As an alternative way of looking at the forecasted
funds flows, Mr. Mehta also prepared a forec9st of cash receipts and disbursements (Ex-
hibit 9). The monthly T-accounts underlying the forecasts are given in Exhibit 10, and a
summary of the forecast assumptions is in Exhibit 11.
Mr. Mehta handed over the forecast to Mrs.Pundir with a graph showing projected
sales and month-end debt outstanding (Exhibit 12). After studying the forecasts for a few
moments, Mrs. Pundir expostulated,
This is worse than I expected. The numbers show that we can't repay All-India's loall by the end
of December. The loan officer will not accept this forecast as a basis for more credit. We need a
new plan, and fast. We neeb those loans in order to scale up for the most important part of our
business seayon. Let's go over these assumptions in detail and look for any opportunities to irn-
prove our debt position.
Then, casting her gaze toward the stack of memos she had pushed aside earlier. she nlut-
tered, "Perhaps some of these proposals will help."

'The selection of October as the loan-cleanup month was irnpcped by the hank on the grounds of tradilion. Seil-
sonal loans of any type made by the bank were to be cleaned up in October. Mrs. Pundir had seen no reascn prc-
viously to challenge the bank's tradirion.
120 Case 9: Kota Fibres. Ltd.

EXHIBIT 1
Summsry of Monthly S d q A&ud for 2000

January
February
March
April
May
June
July
August
September
October
November
December
Year

EXHIBIT 2

~ (
--
Historical and Forecast Anaunl Ineome Statements (in rupees)
1999(ActW) 2001(Forecast)
~ )

Gross sales
Excise tax
Net sales
Cost of goods
, Grosspro8ts
Operazing expenses
Depreciation
Interest expense
Profit before tax
I ~ c o m etax
Net profit
Financial Forecast 121

EXHIBIT 3
Historical and Foreast B a l m Sheets Cm rupees)

Cash
Accounts receivable
Inventories
T d current assets
Grass PF&E
Accumulated depreciation
Net PP&E
Total assets

Accounts payable 759535 I, 157.298


Notes to bank (deposits at bank) BE14,102 3,463,701
Accrued taxes 0 ( 180,654)
Total current liabflities 1,443,637 4,44035
Owners' equity 1 1.85 1,867 11,187,816
Total liabilities and equity 13,2%,6tM 15,628,161

EXHIBIT -4
't -
'&&in@eldSales ~ a a a g e r
~ e &
-<. ,
TO: Mrs. G. Pundir
From: Mr. A. Bajpai

January 7.2001

. _-
3,-

2-

As you know, pandiehemy Textiles is coN'i&ring us to be their prime yam supplier for this year. Purchases
would be In the ~ g h b of oRs6,000,000~ and are not reflected in our current sales forecast. Pond~cheny
would be one of our l q e s t accounts. They have accepted our terms on price, but have asked for credit terms of 80
days. net. Unless we extend our cedi1 terms, Pondichaq will mdo business with us. We can expect that
Pondlcheny will purchase our y m a c w w~ltyearinabout +hc same pattern as our ofher customers.
<.i,
-- I
;
,
.
*-
? r'-~-.- .,-,:m
If you approve iffis exception to wr sta'n&rd'te&s P5 days), the Pondicherry district sales office imme-
diately will meet its quarterly sales q u o a Please indicate your approval below.

Approved:
122 Case 9: Kota Fibres, Ltd.

EXHIBIT 5
Memo from Transportation Manager_ - -"%& ?
-- -&9
To: Mrs.G.Pundir
From: Mr. R. Sikh

January 2,200 1

I have been tracking our supply shipments 111 ihe last six months as you asked me to. The new road between Kota
and New Delhi has improved reliability of Be shipments significantly. Our supplier's new manufacturingequip-
ment is now running consistently, and they have been meeting their shipment dates consistently. As a result, I
would propose that we reduce our raw-material-inventory requirement from 60 days to 30 days. This would re-
duce the amount of inventoq we are carrylng by one month, and should free up a lot of space in the warehouse. I
am not sure if this will affect any other depanment since we will be buying the sane amount of material, but it
would make inventory tracking a lot easier for me. Please let me know so we can implement this in January.

EXHIBIT 6
Memo from PurchasingAgent
I

To: Mrs. C. Pundir


From: Mr. R. Mdnan

January 5,2001

Hibachi Chemicals of Yokohama has approxhed us with a proposal to supply us polyester pelleb on a "just-in-
time" basis from their plant in Majala (20 km away). These pellets account for 35 percent of our raw-material
purchases. I am looking into the feasibility of this scheme-in particular, whether Hibachi can actually perform
on this basis-and will rtpon back in two weeks. If the proposal is feasible, it would reduce our inventory of
pellets from 60 days outstanding to only 2 or 3 days.

EXHIBIT 7
Memo from Operations Manager
u
To: Mrs.G. Pundir - '-
From: Mr. L. Gupta

January 7,2001

. You asked me to estimate the production efficiencies arising from a scheme of level annual production. In
bssence, there are significant advantages to be gained:
Cross profir margin would rise by 2 or 3 percent. rellecting labor savings and production efficiencies gained
from a stable work force and the absence of cenain seasonal training and setup costs.
Seasonal hirings and layoffs would no longer be necessary. permitdng us to cultivate a stmnger work force
and, perhaps, suppressing labor unrest. You \\ill recall that the unions have indicated that reducing seasonal
layoffs will be one of their major negotiating objecti\es this year.
Level production entails lower manufacturing risk. With the load spread throughout the year, we suffer less fmm
equipmek b d d o w n s and can match the routme maintenante better with the demand on the plant and equipment.
EXHIBIT 8 .,
-. - +.

:-,-- -
Monthly Forecast of Income Statements and Balance Sheets for 2001 (in rupees)
.=.: - - :.I . . . - 8 , . ." * -J:,..?.-.:~ .-r.-.-.. ..'. -~~
.

January February March April May June .July August September October November ~ e c e G b e r
Gross sales 2.616.120 2,892,825 4,447,404 8,804,250 13,885,560 17,588,376 16,315,533 8.57i.824 5,031.000 4,447,404 3,531,762 2,767,050
Excise taxes 392.41 8 433.924 667.1 1 1 1,320,638 2,082,834 2,638,256 .2,447,330 1,285,924 754,650 667,l 1 1 529,764 415,058
Net sales 2,223,702 2,458,901 3,780.293 7,483.61 3 1 1,802,726 14,950,120 13,868,203 7,286,900 4.276,350 3,780,293 3,001,998 2,351,993
Cast of goods sold
Gross profit
Operating expenses
Depreciation
Interest expense
(income) (1 )
Profit befare taxes
Income Taxes

;.!i&g.
Net profit
-.
~ssets t . 4 , ~rs.t;~...;.wgq -
Cash (3, 750,000 750,000 750,000 750.000 750,000 750,000 750.000 750,000 750,000 750,000 750,000 750.0
Amunts receivable (3)
Inventories (4)
Total cumnt assets
Net -prop.
- -plant
& equip. (5) 8,527,237 8,443,107 8,706,060 8,619,013 8.53 1,966 8,792,002 .8,702,038 8.61 2,075 8,869,194 8,776,314 8,683,434 8,937,637
Total assets 14,358,721 18,334,774 26,324,045 37,308,065 46,945,348 48,760,411 41,964,914 30,437,233 21,573,190 17,676,200 16,102375 15,628,161
Liabilities and Owners' Equity
Accounts payable (6) I ,6 14,553 4,010.8 18 6,805,539 8,842,088 8,!42,024 3,883,534 1.935531 1,614,553 1 ,I 10,950 690,358 1,039,007 1,157,298
Note payable-bank (7) 1 ,146,268 2.962.622 8.767.030 17.4 19,379 26,997,556 32.950.665 27.167,192 15,795,793 8,352,899 5,002,010 3,278.054 3,463,70 1
Accrued taxes (8) (76,220) (147,190) (180,148)' (91.611) 136,140 0 280.794 330,203 0 (37,653) (97,148) (180,654)
Total current liabilities 2,684,601 6,826,250 15,392,421 26.1 69,856 35,275,720 36,834,199 29,383.5 17 17.740.548 9,463,849 5,654,715 4,219,913 4,440,345
Shareholders' equity (9) 1 1.674.120 1 1.508,524 10,931.623 1 1 ,I 38.209 1 1.669.627 1 1.926.212 12.581 397 12.696,685 12,109,341 12,021.484 1 1,882,662 1 1,187,816
Tcml li,ibilitics &
equity 14,358,721 18,334,774 26,324,045 37,308,065 46,945,348 48,760,411 41,964,914 30,437,233 21,573,190 17,676JUO 16,102,575 15,628,161
( 1 ) Interest expense = Notes Payable ' 14.5%/12 months.
(2) See Exhibit 9.
(3) See panel 1 . Exhibit 10.
(4) See panel 2, Exhibit 10.
(5) See panel 6 , Exhibit 10.
(6) See panel 3. Exhibit 10.
(7) Plug figure.
- (8) See panel 5 . Exhihit 10.
(9) See panel 4. Enhihit 10.
EXHIBIT 9
Schedule of Cash Receipts and Disbursements for 2001 (in rupees)
- -

~ a n ~ & February Mar& April May June July August September October November DecemUer
Assume:
Sales 2,616,120 2,W,W4 42847,4@4 8,804,250 13,885,560 17,588,376 16,315533 8,572,824 5,031.000 4,447,404 3,531,762 2,?67,0M
Purchases (1) 2,446,072 4%842,338 7,657,058 91673,607 8,973,543 4,715,053 2.767.050 2,446,072 1,942469 1,521,878 1,870,526 1,988,817
Debt outstanding 1,146,268 2,%2,622 8,767,030 17,439,379 26,997556 32,950,665 27,167,192 15,795,793 8,352,899 5,002,010 3,278,054 f,463,?Q1
Rocefpts:
A&u ~ v b l e 2 3 15500 2,374,632 2,726,802 3 5 14,657 &14K1,142 la836774 15,366,686 17,079,239 13.218,449 7.1 56,0911 4,797,562 4,Wl,l4
wllaeled
New borrowings 452,166 1.816.354 5&Q4,4W 8,652,349 9,578,178 5,953,108 (5,783,473)(1 1.37 1.400) (7,442,894) (3,350,889) (1,723,956) l85,&.
(rwa~wnts)
I%4~a8.:
Amfits 1,591,054 2,446,072 4,842,338 7,637,058 9,673,@7 8,973,543 4.7 15,053 2,767,050 2,446,072 1,942,469 1,521,878 1,894326
paid l2J
Capid expenditures 0 0 350.000 0 0 350.000 0 0 350,000 0 0 .. 350,W
Interest payments 1 1,058 24,825 70,867 158.210 268.352 362,187 363,212 259,568 145,898 80,686 50,025 40,73 1
Excise tax paid 392,4 18 433,924 667,111 1,320438 2,082,834 2238,256 2,447.330 1,285,924 754,650 667.1 11 529,764 415,058
Clpmtingexpenses 454.501 454,501 454501 454,501 454,501 454,501 454,501 454,501 454,501 45431 454,501 454,501
Acmed income
tax paid 0 0 0 0 0 460,390 0 0 292.770 0 0 0
Wage.$ 540,958 83 1,665 1,646,395 2,596.600 3.289,026 3-051,005 1.603.1 18 940,797 83 1,665 660,439 5 17,438 635,979
Dividends 0 0 500,OOO 0 0 500.000 0 0 500,081) 0 0 500,OOO
Subtotal:
Disbursements 2,989,989 4,190.986 8,531,210 12,167,005 15,768,320 16,789,882 9,583,214 5,707,839 5,775,555 3,805,206 3,073,606 4,266,794
Racdpts-
DisePvsaments (12.323) 0 0 0 0 0 0 0 0 0 0 0
BOP cash balance 762,323 750.000 750,000 750.000 750,000 750,000 750.000 750.000 750,000 750,000 750.000 750,000
EOP cash balance 750.000 750,000 750,000 750,000 750,000 750,000 750.000 750,000 750.000 750,000 750,000 750,000
( I ) Equal 10 55 percent of sales in period (T+2).
(2) Equal to purchases ~npenod (T- I).
-. % $
~ m ' 0 0 0 P . m m ~ ~
R 3 8 bC"W.PI
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EXHIBIT 10 (continued)
Forecast T-Accourrts Supporting Financial Statements (in rupees)
-

-"& +It '.


-
' .t January February March Apfi May June July August September October ~ o v e m & December

4. Schedule of Shareholder's Equity


Beginning of period 1 1,851,967 1 1,674,120 1 1,508,524 10,931,623 11,138,209 1 1,669,627 1 1,926.212 12,581,397 12,696,685 12,109,341 12,021;484 1 1,882,662
Plus net profit (177,847) (165,596) (76,900) 206,586 531,418 756.585 655.1 85 115.288 (87,343) (87,857) (138.822) (194,847)
LESS dividends 0 0 500,aOa 0 0 500,000 0 0 500,C100 0 0 50Qp0p
Endsf period 11,674,120 11,508,524 10,931,623 11,138,2@ 11,669,627 11,926,212 12,581,397 12.6%,685 12,109,341 12,021,4M 1
5. Schedde of Accrued Taxes
Beginning of period 0 (76,220) (147.190) ((180,148) (91,611) 136,140 0 280,794 330,203 0 (37,653) (97,148)
Plus monthly tax
expense (@ 30%) (76,220) (70,970) (32,957) 88.537 227,751 324,251 280,794 49,409 (37,433) (37,653) (59,4953 (83,506)
Less quarterly tax payments 0 0 -0 0 0 460,390 0 0 292,770 0 0 0
End of period (76,220) (147,190) (180,148) (91,611) 136.140 0 280,794 330,203 0 (37,653) (97,148) (1 80,654)
6. Schedule of Property,Plant and Equipment
Beginning gross PPBrE 10,095,646 10,095,646 10,095.646 10,445,646 10,445,646 10,445.646 10,795,646 10,795,646 10,795,646 11,145,646 1 1,145,646 1 1,145,646
Plus capital expenditures 0 0 350,000 0 0 350,000 0 .O 350,000 0 0 350,000
Ending gross PP&E 10,095,646 10,095,646 10,445,646 10,445,646 10,445.646 10,795,646 10,795,646 10,795.646 11,145,646 11,145,646 11,145,646 11,495,646
Monthly depreciation
expense 84,130 84,130 87.047 87,047 87.047 89.964 89,964 89,964 92,880 92,880 92,880 95,797
Less cumulative depr'n. 1,568,408 1,652,539 1,739,586 1,826,633 1,913,680 2,003,643 2,093,607 2,183.57 1 2,276,45 1 2,369,332 2,462,212 2,558,009
Ending net PP&E 8,527,237 8,443,107 8,706,060 8,619,013 8,531.966 8.792.002 8,702,038 8.612,@75 8,869,194 8,776,314 8,683,434 8,937,637
Financial Forecast 127

EXHIBIT 11
Forecast Assumptions
---

Ratio of:
Income taxlprofit before tax 3Wo
Excise tadbales 15%
This month collections of last month's sales 40%
This month colleaions of month-before-last sales 60%
PurchasedSales two nlonths later 55%
Wages/Purchases 34%
Annual operating expenhdAnnual sales 6.00%
Capital Expenditures (every third month) 350,000
Interest rate on borrowings (and deposits) 14.5%
Minimum cash balance 750.000
DepreciationlGross PP&E (per year) 10%
(per month) 0 83%
Dividends paid (every third month) 500.000

EXHIBIT 12
Trend of Certain Financial Accounts by Month (in millions of rupees)
5
-' . .

-----------------

1%,odl *
dl & @-A' $29
. $
00 ,0\*
3
'
'~
&
*P '+i wx @
r&I(pofi04e* IF"".+coeX