finance ppt- kota fiber pvt ltd

ANALYSIS OF KOTA FIBRES CASE STUDY

Rishabh Agarwal 330Ankit Waghrecha328Tushar jain 126Rakesh Verma 329Vatsalam 126Akshay Vohra 125

Kota fibres Ltd. Was founded in 1962 to produce nylon fibres at its only plant in Kota.

Ms. Pundir is the managing director and principle owner of the firm.

It supplies synthetic fibre yarns used to weave colorful cloths for making saris.

To start with

Kota fibres had a line of credit at the All-India bank where it also maintained its cash balances.

Line of credit-An arrangement in which a bank or vendor extends a specified amount of unsecured credit to a specified borrower for a specified time period also called credit line.

Main problem faced by the company was the loan repayments to be done to All-India Bank, which was already delayed because of Ms Pundir’s reassurances.

Eye-catching problem

Kota fibres was continually taking loans from the All-India Bank in spite of the proper sales.

Gross sales was projected to reach 90.9 million in year that ended 31st Dec,2001.

Gross sales is the total invoice value of sales before deducting customer’s discounts and allowances.

Increased loans

Kota fibres had a peak season around late summers when merchants start producing saris for the upcoming festival “Diwali”.

Due to which financial requirements varied across the year.

Varying financial requirements

Key Determinants of Kota`s Borrowing Needs

Company BackgroundProduces Nylon Fiber by using New Technology and Domestic Raw Material. Its Yarn is used by the Local Textile Weavers which in turn are manufacturing Cloths for making Sari.

Synthetic Textile MarketMarket is stable with seasonal fluctuations and unit growth in the industry was expected to 15% per year.

Key Determinants of Kota’s Borrowing Needs

Supply Chain System:

Consumers purchase Sari from Cloth Merchants, which may give credit for supporting the Sales.

Cloth Merchant maintains Low level of inventory and built stocks in advance only during the peak seasons.

Textile Mills grants credits to the Merchants. Yarn Manufacturers have to supply the material on

credit for capturing the market share. Little or No Credit is given to the Yarn

Manufacturers by their Suppliers.

Key Determinants of Kota’s Borrowing Needs

Production and Distribution System

Thin profit margins has prompted her to operate plant at full capacity for two months and at modest level for rest of the year.

Has two warehouses to meet the customers demand.

Carrying finished goods from the warehouse to the customers was a difficult task because of poor roads and unavoidable calamities in midst of long distances like accidents.

Key Determinants of Kota’s Borrowing Needs.

Conclusion from the Above Slides

Supply of orders delayed ~ Kota Fiber receivables get delayed which means the firm runs out of cash for proceeding with the downstream activity of the company.


Company’s performance It’s a profitable firm. Sales grew at 18% for the year 2000. Gross Sales Projected to reach 90.9 million in2001. Net Profits reached 2.6 million in 2000.

Being a profitable fund the company has always given high dividends to its Equity Holders. Pundir’s family believed that funds left in the firm were at greater risk than if the fund is returned to the equity holders.


1999actual in

2000actual in

rs)

2001forecast in

rs)

Gross Sales 64487358 75867480 90900108

Excise Tax 9673104 11380122 13635016

Net Sales 954814254 64487358 77265092

Cost of goods

44496277 53865911 66993380

Gross profits

10317978 10621447 1027172

Operating expenses

3497305 4828721 5454006

Depreciation 769103 908608 1073731

Interest expenses

910048 1240066 1835620

Profit before tax

5141521 3644052 1908355

Income tax 1542456 1093216 572506

Net profit 3599065 2550837 1335848


While making a reassessment Pundir proposed of paying a dividend of 500000 quarterly to its 11 members.

Which implies distribution of 20,00,000 . Income statement of 2000 in previous slide has

shown that a net profit is of 25,50,837. Which means cash left for the year 2001 would

be 25,50,837 - 20,00,000=5,50,837 .


So Cash left with the firm= 5,50,837 . Cash to be maintained at the start of the

year = 7,50,000. A lone of minimum 1,99,163 is required

to operate the fund at the start of the financial year 2001.


ANALYSING KEY WORKING CAPITAL

RATIOS

Cash Cycle is basically the duration of time a firm takes to convert the activities which require cash, back into cash returns.

Cash Cycle is the more appropriate way to assess the liquidity position of a company and also for comparing two or more companies in this respect. This is because this takes into account the investment quality of the two critical assets i.e Receivables and Inventory. This tells us the time it takes to convert these two assets into cash, which is what creates real liquidity.

Cash Cycle

Suppliers of raw material provide little to no credit. Kota has to borrow to purchase inputs in advance. Once the raw material is purchased it is processed

into fiber yarn and then sold to textile mills. (The mills will purchase from Kota only if it is willing to sell the yarn on credit.)

The textile mills then sells the finished cloth to merchants who then sells to consumers.

In sum, Kota is forced to purchase raw materials in cash, and then float its finished product long enough for textile mills to turn the yarn into material and then sold to the final consumer.

Kota is forced to finance the entire production.

Direct result of Kota’s cash cycle

Cost of Goods Sold: 53,865,911Inventories: 1,249,185 IT = CFGS / Inventories = 53,865,911 / 1,249,185 = 43.12 IT in Days = 365 / 43.12 = 8.4 ITD = 9 days

Inventory Turnover Ratio

Net Sales: 64,487,385Accounts Receivable: 2,672,729 RT = Net Sales / Accounts Receivable = 64,487,385 / 2,672,729 = 24.12 RT in Days = 365 / 24.12 = 15.1 RTD = 16 days

Receivables Turnover Ratio

Total Supplier Purchases: 42,419,371Accounts Payable: 759,535 PT = TSP / Accounts Payable = 42,419,371 / 759,535 = 55.85 PT in Days = 365 / 55.85 = 6 PTD = 6 days

Payable Turnover Ratio

Cash Cycle

Operating Cycle = ITD + RTD = 9 +16 = 25 days Cash Cycle = Operating Cycle - PTD = 25 - 6 = 19 days

Results

• Cash cycle is 19 days. • Payable Turnover is 7 days.

• Maintains raw material inventory of nearly 60 days.

• Seasonal Business.

• Schedule of Cash Receipts and Disbursements for 2001 (Exhibit 9) in the first 4 months, the purchase of Kota Fibers is bigger than sales.

Forecasting

•A financial forecast is normally an estimate of future financial outcomes for a company or country (for futures

and currency markets). Using historical internal accounting and sales data, in addition to external market

and economic indicators

•Unlike a financial plan or a budget a financial forecast doesn't have to be used as a planning document. Outside analysts can use a financial forecast to estimate a company's success in the coming year.

Forecasting is used to answer important questions, such as:

How much profit will the business make?

How much demand will there be for a product or service?

How much will it cost to produce the product or offer the service?

How much money will the company need to borrow?

When and how will borrowed funds be repaid?

Properties of Forecasting

The principal driver of the forecasting process is generally the sales forecast.

The forecasting approach presented in this section is the Percentage of Sales method.

Since forecasting can be inaccurate due to uncertainty, we should consider developing several forecast under different scenarios.

Longer the planning period, the more inaccurate the forecast.

Forecasting of large inter-related items is more accurate than forecasting a specific itemized amount.

Importance of Forecasting

Enables management to change operations at the right time in order to reap the greatest benefit

Developing new products or new product lines. Prevents the company from spending time and

money developing, manufacturing, and marketing a product that will fail.

Forecasting is also used by outsiders to value companies and their securities.

Forecasting Financial Statements

Budget – Projection of future cash receipts and cash disbursements of firm over various intervals of time.

Budget – prospective cash positions v/s Forecast statements – expected estimates of all

assets, liabilities and PnL items. Forecast statement is before the budget. Tax Estimates from forecast income statement

used when preparing the cash budget.

Why not do away with Budgets?

Summary of a firm`s expected revenues and expenses over a future period

Combination of :- Cost of goods sold Selling general and administrative expenses Other income and expenses, depreciation Net income after taxes

Forecast Income Statement

Forecasting Assets Receivable Balance = Projected sales/Receivable Turnover ratio. Estimated investments production schedule sales forecast Inventory Forecast Net PP&E = Planned expenditures + Net fixed assets – fixed

assets sold - depreciation

Forecasting Liabilities Accounts Payable = Projected purchases – total projected cash

payments for purchases Accrued Wages and Expense based on production schedule Accrued income taxes = taxes due on forecasted income –

actual tax paid Shareholders Equity = Equity( 6 months before) + profits after

taxes (during that period) – amount of dividends paid. Cash and Bank Loans

Forecast Balance Sheet

Percentage of sales method Forecasts balance sheet and PnL by assuming

that most accounts maintain a fixed amount of sales

More Flexible than traditional method

Alternate Approach To Forecasting

Percentage Of Sales Process

Conclusion and Recommendations

• Ms. Pundir is faced with resolving a surprising cash shortage immediately. As her management style is extremely delegative, it is important that she analyzes Kota Fibres’ financial situation before making any decisions.

• By observation Ms. Pundir weighs her focus on shareholder profits more so than the company’s liquidity and forecast for the future.

• Overall, Kota Fibres, Ltd. is doing a good job at managing their liquidity, although the projection does show a slight decline in this area. This means they could have potential issues with paying their bills on time and converting their assets to cash if they follow the 2001 projection.

• In the area of Asset turnover and AR/AP, Kota Fibre is operating at an acceptable level across the board. However, one red-flag is the extended credit term of 80 days net requested by Pondicherry Textiles. This would reduce the amount of cash on hand during the year and increase their liabilities due to the 80 day credit term.

• In this circumstance, Kota Fibres should not accept this memo as it will have an unfavourable effect on the business. Having less cash on hand, tied up in receivables, will not allow Kota Fibres to be able to pay off the All-India bank before December.

the two proposals from the Transportation Manager and the Purchasing Agent should be approved. A reduction in raw material inventory and finished goods inventory on hand will result in less inventory being accounted for in the financial statements and increase the amount of overall liquidity since Inventory is the least liquid asset.

Kota Fibres must also recognize the contributing factor of the shortage of cash on hand.

This is due to the firm’s inefficiency to use their assets to generate sales. Kota Fibres should boost this number by increasing their amount of total assets.

Their Debt-to-equity standing reflects another sign of how they can increase their cash on hand. The projection for 2001 addresses this area well, and should be pursued.

Kota Fibre will need to rethink its strategy to generate a profit using the 2001 projection. Across the board, they will be facing a decrease in profitability if they execute this plan. They will need to improve their operating efficiencies and levels of indebtedness to increase their bottom line, ultimately resulting in their ability to make their creditors and shareholders happy.

It is crucial that shareholders are informed on the recommended actions. This may allow for a different approach to business rather than Ms. Pundir’s sole objective of maximizing shareholder wealth.

Understanding the seriousness of the financial situation Kota Fibres is in with regards to paying their bills on time and future forecasts, ethics and responsibility may also come forward as shareholders should be willing to reinvest profits in a company that will benefit them in the long run.

finance ppt- kota fiber pvt ltd

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