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CASE 3: KOTA FIBRES, LTD.

Kota Fibres, Ltd. is an India-based supplier of synthetic fiber yarns used in


making traditional saris. Kota showed consistent profitability, posting 18% sales
growth and net profit of Rs 2.6 million in 2000. It should be noted that the highly
competitive synthetic-textile market is expected to reach 15% industry growth per
year.
Kota Fibres Ltd’s uses an aggressive approach to debt structure, regularly
opting to use an All-India Bank & Trust Company’s line of credit for its expenses.
However, due to low cash conversion, the company breached the line of credit’s term
for cleanup and its extensions, removing the ability of the company to take loans
from the said bank. Mrs. Pundir, Kota’s managing director and principal owner,
needs to find ways to increase the company’s cash conversion to cleanup the debt.
Various strategies1 are presented in a stack of memos located at Mrs. Pundir’s
table. Each memo can improve a certain financial aspect of the company. In addition,
Mrs. Pundir can opt to decrease the huge dividends paid to stockholders. This steps,
plus controlling key financial ratios, will clean up the debt by end of 2001.
Kota aims to increase liquidity by speeding up the cash conversion cycle. Its
current objective is to cleanup outstanding debt by the end of 2001. However, the
risks of each strategy should be considered, particularly its effect on the company’s
goodwill which is severely important on competitive industries. With this, we used Mr.
Mehta’s forecasted cash budget to consolidate the effect of each strategy to the net
outstanding debt of the company.2 After this, we computed for the optimum cut of
dividends to be paid.3 We also analyzed operating expense and its effect on
outstanding debt. 4
Mr. Mehta’s forecasted cash budget shows outstanding debt at 3,463,701 and
the company has a current cash ratio of 0.17, a bad figure to present to the bank.
After analyzing the impact of implementing the suggestions on the outstanding debt,
we found that the second strategy is the only proposal that should be implemented.
The strategy reduces outstanding debt at year-end by almost 700,000 rupees
without much risk.
The first proposal of improving credit period for a new customer will increase
the forecasted net profit but will result to more debts. Going back to the company’s
objectives, the proposal is rejected. The third proposal is also rejected because
although it has the positive fiscal impact on debt payment, we deem the just-in-time
strategy as risky and in realization of risk, tarnish the company’s goodwill. The fourth
proposal of implementing a scheme of level production should not be approved
because it entails additional labor and holding costs.
In addition to using the second proposal, we recommend controlled reduction
of operating expenses from 6% to 5% of sales and dividend decrease to a lump sum
year-end value of 240,896. Implementing our recommendations will result to a total
loan clean up at year-end 2001.5
TABLE 1

1
See Table 1
2,3,4,5
See Appendix
Strategy 1 Sales Field Manager: Improve credit terms from n/40 to n/80.

Strategy 2 Transportation Manager: Reduce raw material inventory from 60 days to 30

Strategy 3 Purchasing Agent: 35% inventory from Hibachi Company to use just-in-time basis.
Reduce days’ inventory from 30 to 2-3

Strategy 4 Operations Management: Stabilize work force