Prepared ByShivendra Singh 122 Navjyot Singhvi 123 Neerav Sundriyal 124 Prabhdeep Singh Virdi 215 Ankit

Shah 217 Dishank Shah 218

COMPANY BACKGROUND
Was founded in 1962

Produces nylon fiber yarn

Ms Pundir Profitable firm Seasonal production

SUPPLY CHAIN SYSTEMS

Polyester Pellets and other Raw Materials

Suppliers

Textiles

KOTA FIBRES LTD.

Mills

Merchants

End User

Spools of Yarn

Saris and Textiles

ISSUES SURFACED IN 2001 WITH KOTA FIBRES LTD.

Payment of excise tax to move their product
Line of credit not being repaid according to the term.

Request for new loans from All-India Bank & Trust

Company.
Due to inflation, interest rate may be higher in upcoming year

on the loans

PUNDIRS ALTERNATIVES OF ACTION

Analyse the financial situation Reject the offer for credit extention 80 days The two proposals from the Transportation Manager and the

Purchasing Agent should be approved

Level Production Efficiency 0 Dividends for the year

CASH CYCLE
Inventory Purchased

Inventory sold

Cash Received

Inventory turnover = 38.562 Period = 10 A/P turnover = 17.919 Period = 6

A/R turnover = 24.191

Period = 16 Time

Cash paid for Inventory

Operating cycle = 26 Cash cycle = 20

Current Forecast
35000000
32950666

30000000 25000000 20000000 15000000 10000000 5000000 0 0 2 4 6 8 10 12 14

Sales

A/R

INV

A/P

N to B

Memo 1 - Pondicherry
Pondicherry textile considering making kota fibers as

their prime yarn prime yarn supplier giving them the sales of 60 lakh rupees.
Pondicherry textile is asking for 80 days credit net. Kota fibers current credit period is 45 days.

Annual Income Statement Forecast

Current Forecast Gross Sales Exercise Tax Net Sales Cost of Goods Gross Profit Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit 90900108 13635016 77265092 66993380 10271712 5454006 1073731 1835620 1908355 572506 1335848 Forecast After considering Memo 1 96900108 14535016 82365092 71415380 10949712 5814006 1073731 2078159 1983815 595145 1388671

Ratio Analysis
Recievable Turnover Ratio

Recievable Turnover in Days Inventory Turnover Ratio Inventory Turnover in Days Payable Turnover Ratio Payable Turnover in Days Operating Cycle Cash Cycle -

19.938 19 28.790 13 58.538 7 31 25

Looking at positive aspects

Looking at the proposal it looks good as it is a profitable deal and also will help company to expand

Also it will help in increasing sales upto 60 lakh.

Current status of liquidity of the company

Current ratio which must be around 2 comes out to be

1.2 and quick ratio which must be around 1 comes out to be 0.72 which states the company would not have enough liquidity in meeting up short term obligations.
The company has already taken loan to keep the bank

balance of 7,50,000
The company also needs an urgent loan to payoff the

excise duty.

Drawbacks
The company would require another loan to start the

production.
Also 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.

40000000 36870938 35000000 30000000 25000000

20000000
15000000 10000000 5000000 0 0 2 4 6 8 10 12 14

Sales

A/R

INV

A/P

N to B

Suggestion
I would suggest that the company must not go for this deal as they cannot afford to go for another loan at this moment and also the credit period is very high and would reduce the amount of cash in hand increasing the liability. However they can try to arrange the funds from other sources like:1 Ms.Pundir must cut down the dividend as the rate of dividend given is too high to the shareholders hence a huge amount of cash of around 20 lakh is drawn annually which must be reduced to an extent or should be stopped for a year. 2. If the members do not agree for stopping the dividends then they must try to arrange some capital from their side so that they can use it for the expansion in Pondicherry. 3. Dissolve the cash balance of 7.50 lakh.

Conclusion

In this circumstance, Kota Fibers should not accept this

memo as it will have an unfavorable effect on the business.

Having less cash on hand, tied up in receivables, will not

allow Kota Fibers to be able to pay off the All-India bank before December.
Hence overall its a good proposal from the point of view of

increasing the sales and beneficial from the short term perspective but not good for the future financial stability of the company as it would lead to increase the borrowings of the company.

Memo 2: Inventory Reduction

Reduce inventory through better transportation management

The first alternative involves a proposal from the

transportation manager who suggests that since shipments in the last 6 months have been on time due to the new road between Kota and New Dehli, Kota can reduce its raw material inventory requirement from 60 to 30 days, which would reduce the companys inventory by one month.

Annual Income Statement Forecast

Current Forecast Gross Sales Exercise Tax Net Sales Cost of Goods Gross Profit Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit 90900108 13635016 77265092 66993380 10271712 5454006 1073731 1835620 1908355 572506 1335848 Forecast After considering Memo 2 90900108 13635016 77265092 66993380 10271712 5454006 1073731 1323975 2420000 726000 1694000

The New Inventory Policy

Reducing raw-material inventory by 30 days will reduce peak debt, respectively and will also increase the profitability of the firm by . But company should be aware of the dangers of reducing inventory (e.g., stockouts), a reduction from 60 to 30 days(In Such case they

should be , although significant, still leaves a good margin of safety. To adjust the spreadsheet, simply change the purchasing from two months ahead to one month ahead. In addition, wages will have to be changed to be driven by the same months purchases rather than last months purchases.

Impact of the proposal on financials of Kota

The proposal will have a good impact on Kotas short-term

debt position as reduced amount of inventory will reduce the debt outstanding in all the months from January to December . The proposal will also reduce the monthly borrowing requirement in most months from January to December The decrease in borrowing requirement and debt outstanding makes sense as the proposal reduces inventory requirements to half, which means that the amount of financing required for current assets is lesser

Suggestion
I would suggest that the company must go for this

proposal as they can increase liquidity by decreasing the inventory period from 60 to 30 days. The firm should move towards inventory reduction cutting down the cash cycle and increase its liquidity. This will tie up less cash in inventory that is sitting in the warehouse. From these plans, company does not have to purchase more inventory in the first two months since it will use raw material on hand and order accordingly.

Balance Sheets Forecasts

Current Forecast Cash Accounts Recievable Inventories Total Current Assets Gross PP&E Accumulated Depreciation NET PP&E Total Assets Accounts Payable Notes to Bank (Deposits at Bank) Accrued Taxes Total Current Liabilities Owners Equity Total Liabilities and Equity 750000 3715152 2225372 6690525 11495646 2558009 8937637 15628162 1157298 3463707 -180654 4440351 11187810 15628161 Forecast After considering Memo 2 750000 3715152 1986761 6451914 11495646 2558009 8937637 15389551 1039007 3180390 -180654 4038743 11187810 15226553

30000000

25000000
22800693

20000000

15000000

10000000

5000000

0 0 2

Sales

A/R

INV

A/P

N to B

10

12

14

Ratio Analysis
Recievable Turnover Ratio

Recievable Turnover in Days Inventory Turnover Ratio Inventory Turnover in Days Payable Turnover Ratio Payable Turnover in Days Operating Cycle Cash Cycle -

24.191 16 41.406 9 75.318 5 24 19

Memo 3 -Proposal by Hibachi Chemicals

Hibachi Chemicals plant which are the suppliers of

polyester pellets is located 20 km away from Kota fibres.

Polyester pellets accounts for 35% of the raw materials

purchases made by Kota fibres.

Supplying of pellets by Hibachi chemicals on the basis

of just-in-time strategy .

Just-in-Time
Just-in-Time (JIT) is a production strategy that strives to improve a business return on investment by reducing in process inventory and associated carrying costs.
JIT focuses on continuous improvement and can improve a manufacturing organization's return on investment, quality, and efficiency. It saves warehouse space and costs.

Analysis of Inventory
If the Kota fibre plans to make a deal with the Hibachi

Chemicals then following will be the forecast for the year 2001. Presently the purchasing of inventory has to be done two months before . Therefore the purchasing of the inventory for the month January and February had been done already in the month of November and December

 The inventory cost of pellets accounts for Rs 2500000

for the month of March and April .If Just-in Time gets implemented then there is no need to invest in pellets for the month of March and April.
Therefore the firm has increase in the cash assest of

Rs 2500000.
The amount will help the Kota fibres to solve the

problem of shortage of cash on hand.

Annual Income Statement Forecast

Current Forecast Gross Sales Exercise Tax Net Sales Cost of Goods Gross Profit Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit 90900108 13635016 77265092 66993380 10271712 5454006 1073731 1835620 1908355 572506 1335848 Forecast After considering Memo 3 90900108 13635016 77265092 66993380 10271712 5454006 1073731 1575582 2168393 650518 1517875

The net profit margin increases to 0.016 which is higher than that of without the implementation of JIT

Looking at positive aspects of just in-time strategy

Increase in the current ratio of firm to 1.53 as

compared to 1.50 which was without the implementation of JIT.(Current assets/Current liablities)
The increase in the current ratio shows that kota

fibres ability to meet its short term obligations.

Cont.
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.

30000000
26432973

25000000

20000000

15000000

10000000

5000000

0
0 2 4 6 8 10 12 14

Sales

A/R

INV

A/P

N to B

Ratio Analysis
Recievable Turnover Ratio

Recievable Turnover in Days Inventory Turnover Ratio Inventory Turnover in Days Payable Turnover Ratio Payable Turnover in Days Operating Cycle Cash Cycle -

24.191 16 32.63 10 78.25 6 28 20

Annual Income Statement Forecast

Current Forecast Gross Sales Exercise Tax Net Sales Cost of Goods Gross Profit Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit 90900108 13635016 77265092 66993380 10271712 5454006 1073731 1835620 1908355 572506 1335848 Forecast After considering Memo 4 90900108 13635016 77265092 66216184 11048908 5454006 1073731 2316124 2205046 661514 1543533

Ratio Analysis
Recievable Turnover Ratio

Recievable Turnover in Days Inventory Turnover Ratio Inventory Turnover in Days Payable Turnover Ratio Payable Turnover in Days Operating Cycle Cash Cycle -

24.191 16 6.634 56 40.119 10 72 62

35000000

30000000

30335673

25000000

20000000

15000000

10000000

5000000

0 0 2 4 6 8 10 12 14

Sales

A/R

INV

A/P

N to B

Actions Leading To Positive Results

Implementation of Memo by Transport Manager for Inventory Reduction 2. Implementation of Memo by Purchasing Agent for JIT Procurement of Pellets 3. Not Granting Dividends till all Outstanding debts are settled 4. Asking Shareholders to invest
1.

Annual Income Statement Forecast

Current Forecast
Gross Sales 90900108

Inventory Reduction + JIT

90900108

Inventory Reduction + JIT + No Dividends

90900108

Inventory Reductions + JIT + No Dividends + Investments

90900108

Exercise Tax
Net Sales Cost of Goods Gross Profit Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit

13635016
77265092 66993380 10271712 5454006 1073731 1835620 1908355 572506 1335848

13635016
77265092 66993380 10271712 5454006 1073731 1095239 2648736 794621 1854115

13635016
77265092 66993380 10271712 5454006 1073731 968895 2775080 832524 1942556

13635016
77265092 66993380 10271712 5454006 1073731 943626 2800348 840105 1960244

Balance Sheets Forecasts

Current Forecast Cash Accounts Recievable Inventories Total Current Assets Gross PP&E Accumulated Depreciation NET PP&E Total Assets Accounts Payable Notes to Bank (Deposits at Bank) Accrued Taxes Total Current Liabilities Owners Equity Total Liabilities and Equity
750000 3715152 2225372 6690525 11495646 2558009 8937637 15628162 1157298 3463707 -180654 4440351 11187810 15628161

Inventory Reduction + JIT

750000 3715152 1721982 6187134 11495646 2558009 8937637 15124771 916980 2549491 -180654 3285817 11187810 14473627

Inventory Reduction + JIT + No Dividends

750000 3715152 1721982 6187134 11495646 2558009 8937637 15124771 916980 423147 -180654 1159473 13187810 14347283

Inventory Reductions + JIT + No Dividends + Investments

750000 3715152 1721982 6187134 11495646 2558009 8937637 15124771 916980 -2122 -180654 734204 13587810 14322015

Result After Inventory Reduction & JIT Implementation

30000000 25000000 20000000 15000000 10000000 5000000 0 0 2 4 6 8 10 12 14
18788696

Sales

A/R

INV

A/P

N to B

Result After Inventory Reduction, JIT Implementation & No Dividends to Stock Holders
30000000 25000000 20000000 15000000 10000000 5000000 0
18788696

10

12

14

Sales

A/R

INV

A/P

N to B

Result After Inventory Reduction, JIT Implementation, No Dividends and Investments from Stock Holders
30000000

25000000

20000000

18904448

15000000

10000000

5000000

0 0 2 4 6 8 10 12 14

Sales

A/R

INV

A/P

N to B

Links To Excel Sheets

Initial Forecast
Memo 1 (Pondicherry Customer) Memo 2 (Inventory Reduction to 30 Days)

Memo 3 (JIT Purchases of Pellets)

Memo 4 (Level Annual Production) Solution 1:Inventory + JIT Solution 2:Inventory + JIT + No Dividends Solution 3: Inventory + JIT + No Dividends +

Investments from Stockholders