Kota Fibres Ltd Case Analysis
Kota is experiencing a number of problems. The manage director to prevent over production and over stocking has resulted to a sequence of hiring and layoffs each year. And the company is suffering from liquidity challenges because it is not in a position to finance its day-to-day activities, so its bank account stands over drawn. This situation has impacted negatively on the company's ability to repay its earlier loans and customers are upset because of delayed delivery.
Mr. Mehta and Ms. Pundir introduced a new quality control unit and hired two sales representatives and three nephews with the objective of creating commitment to the Pundir family. From the case, no audit or analysis was undertaken to ascertain whether the company needed a quality control unit. This is an example of how the company is increasing its operating costs which has contributed to its current liquidity challenges. Ms. Pundir is biased toward addressing shareholders’ needs rather than pursue what is good for business survival.
It is reported that the company had previously declared high dividend payments to its shareholders because Pundir believed that it was risky to leave excess funds to the company. Similarly the company does not value its employees, the company prefers hire people in high season, and firing them in low seasons. Ms. Pundir is confronted with the challenge of addressing a unique cash shortage and this has to be done immediately. As a whole, the projections indicate that Kota Fibres limited is performing well in managing their financial assets.
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However, the company is facing some challenges in the area of liquidity management. The company should increase its total assets. Ms. Pundir’s should engage the stockholders in seeking a lasting solution to the company`s problems. It the shareholders are involved, perhaps they will propose different alternatives rather than Ms. Pundir’s main aim of maximizing the wealth of the shareholders. If the shareholders understand the worrying situation the company is in, they may opt to reinvest a significant amount of the company`s profits which will benefit them in the long-term.
Overview Kota Fibres Limited is a textile fiber manufacturer in India specializing in the supply of nylon fiber to textile mills in the Indian domestic market. These fibers are used to make saris, the traditional women` dress. Given the large number of the female population in India (500 million), the saris industry requires approximately 12 billion yards of fabric per year and the market size continues to expand at a rate of 155 saris per annum. Kota Fibres is run and managed as a family business from 1962 by Ms. Pundir and her family.
In 2000, Kota`s performance surpassed the market average; the company registered approximately 18% growth in its sales revenues, with its net profit standing at INR 2. 6 million. Despite the remarkable growth in revenue, Pundir realized that the firm was suffering from serious cash flow issues. The company`s operations had come to a halt because of a series of overdraws from its bank account. As a result, the company is suffering from shortage of short-term liquidity at a time when the textile industry`s seasonal peak in India has just began. To keep the company going on, Pundir seeks for additional financing from a bank.
Kota Fibres has been in operation for over 40 years, which implies that the company has been profitable to stay this long in business. Kota`s problems are mainly attributed to its fast growth and clear measures are necessary to reduce operating costs and other expenses and restore the company to its profitable path. Statement of the Problems Kota is experiencing a number of problems. To begin with, the seasonal production strategy implemented by the managing director to prevent over production and over stocking has resulted to a sequence of hiring and layoffs each year.
Second, the company is suffering from liquidity challenges because it is not in a position to finance its day-to-day activities; its bank account stands over drawn. This situation has impacted negatively on the company’s ability to repay its earlier loans and customers are upset because of delayed delivery. The third major problem relates to its distribution system. The company had two distribution warehouses. However, it suffered significant challenges in moving the yarn from the factory to the customers with a single trip taking between 10 to 15 days.
The roads were impassable with only one lane. In addition, in 2001, a number of problems emerged that include: inability to pay excise tax before the yarns are transported, the company is not repaying its loans as scheduled, its request for a new loan may not be granted by the All-India Bank ; Trust Company, and it projects that because of inflationary pressures, interest charged on its previous loans in the subsequent year may increase. Analysis From the 2001 projections, the company`s sales revenues reached the 90. million mark in 2001 representing a 15 million rupees growth over the previous year.
Despite this remarkable increase, there are a number of financial challenges that must be taken into account when evaluating the forecast. For example, based on the company`s total assets turnover which tells how efficient the company is using its assets to generate sales, Kota`s total assets turnover ratio is suboptimal. In 2000, the company`s total assets turnover stood at 0. 18 but the projected ratio for 2001 is only 0. 17. This highlights major inefficiencies in the management of assets by Kota Fibres.
By increasing the amount of total assets, the company can be in a position to increase this ratio. In preparing the forecasts for Kota Fibres, Mr. Mehta, the bookkeeper, and Ms. Pundir agreed on various assumptions to arrive at the projections. This is not desirable because the prediction may be misleading. The forecast should be premised on actual figures. Ms Pundir as the owner should hire an accountant or at least assign the book keeper the task of preparing the forecast. The final report on the projections should thereafter be reviewed to check any inconsistencies.
Mr. Mehta and Ms. Pundir introduced a new quality control unit and hired two sales representatives and three nephews with the objective of creating commitment to the Pundir family. From the case, no audit or analysis was undertaken to ascertain whether the company needed a quality control unit. This is an example of how the company is increasing its operating costs which has contributed to its current liquidity challenges. Ms. Pundir is biased toward addressing shareholders’ needs rather than pursue what is good for business survival.
It is reported that the company had previously declared high dividend payments to its shareholders because Pundir believed that it was risky to leave excess funds to the company. Therefore, she preferred the funds to be distributed in the form of dividends. This raises some questions. As the managing director, Pundir is not sure of her competency that is why she fears that if funds are left to the company which she manages they might get lost. In as much as it is true that the overriding objective of any business is to maximize shareholder value, Kota Fibres case seems excessive.
The financial challenges facing the firm can be directly linked to high dividend paid out to the shareholders in the past forty seven years and the company is on its path to bankruptcy. Similarly, the company does not value its employees. Rather than motivating its hard-working employees and giving them permanent employment, the company prefers to hire during the high season, over working the employees and firing them during low seasons. Given the large amounts of money declared to shareholders each year, they should consider re-investing part of the money in their business.
This will permit the company to charge lower prices on its products and gain a larger market share. This could be the best method compared to the existing utilitarianism model of laying off some employees as a means of preventing the company from going bankrupt. Ms. Pundir requested for memos that could give her various insights on the issues. It is however unfortunate that she has not yet reviewed these memos or even convened a meeting with her managers to deliberate on the way forward.
She is quick in dismissing viable business ideas by simply pushing them to the side of her desk yet some of these memos could offer a way of addressing the challenges facing the company. The memos written by key management personnel in Kota Fibres had useful insights that could help in addressing the problems facing the company. The following solutions have been suggested in the memos: The field sales manager notes that the forecasts did not take into account Pondicherry Textile, one of the company`s potential customers in the year 2001.
This new account will be the largest with sales revenues of up to INR 6 million. Although the credit term of 80 days may not be favorable for Kota at this point in time, the terms can be negotiated. If Pondicherry Textile sales were taken into account in the forecasts, the future of the company would have looked more promising and the financier would have no doubt in the company`s ability to meet its future repayment obligations. The second memo from the transportation manager equally addresses some of the problems the company faces.
The transport manager reports that delivery of supplies to the company would become more reliable because a new road had been built between Kota and New Delhi. For this reason, delayed transportation will no longer be an issue. This proposal could reduce raw material inventory turnover from the initial 60 days period to only 30 days. The purchasing agent recommends a new supplier of polyester pellets to be Hibachi Chemicals. Given the huge demand for its products, the company must have an efficient production process.
If Hitachi Chemicals could supply the pellets, Kota will manage to reduce its Pellets` inventory from two months to just two or three days. The final proposal from the operations manager makes recommendations on the desired volume of annual production. The operations manager highlights a number of benefits that the company is likely to gain that include: its gross profit margin will increase up to 3 percent because of a stable workforce. Second, the company would not have to hire workers every season and this will promote unity among the employees and encourage team work leading to increased productivity.
Finally, the company will benefit because there will be low risks associated with manufacturing due to limited breakdowns in equipments. All these proposals from various managers at Kota could address the problems that the company is facing. It is however unfortunate that despite requesting for them, Ms. Pundir makes no effort to go through or even evaluates the solutions suggested by her staff. These are the people on the ground and they seem to understand the genesis of Kota Fibres’ problems. Ms.
Pundir is only looking for avenues through which she can convince her close family members who are the shareholders. As far as the financial statements of Kota Fibres are concerned, the company is in a position to satisfy its short term obligations when they come due. The company has a quick ratio of 2. 38 and a current ratio of 3. 24 respectively. This implies that the company is operating within the acceptable levels. However, the 2001 ratio forecast indicate that the current ratio has dropped to 1. 5, which is below 2. required for a manufacturing company. This indicates that the company will have difficulties in paying its bills in a timely manner given the forecasted production and sales levels.
In 2000, the company`s quick ratio stood at 2. 38 to 1, which was well above the required minimum of 1. 0. However the same ratio in 2001 has declined to 1. This further emphasizes that Kota Fibres will face difficulties in meeting its short-term obligations and that the company may be in serious trouble in the near future. In 2000, inventory turnover is remarkable at 51. 2; however, inventory turnover projected for the 2001 period has dropped to 34. 72. This implies that the company is moving in the wrong direction. It is desirable that a company`s inventory should turn over as many times as possible in a year. From the statements, it can also be seen that Kota Fibres is using only a small portion of its borrowed money to make profits. In 2000, the company had a debt-to-asset ratio of 10. 86%. For the 2001 forecast, the company is expected to have a debt-to assets ratio of 28. 41%.
This implies that the company will have excess financial leverage than it requires. From the debt to equity ratio, we can see that from each dollar supplied by the creditors, the company only used $0. 12 cents in 2000. The 2001 projections indicate a slight increase to $0. 40 cents for each dollar supplied. This figures highlight the fact that the company utilizes less of the shareholders money to fuel the company`s growth. If the company could make use of external debt to finance its operations, it could generate more earnings as opposed to relying only on funds from internal sources.
In terms of its gross profit margin, the company made a 16% gross profit margin in 2000. In 2001, the ratio is projected to drip by 3% to 13%. This indicates that Kota Fibres had a weak profit –to-sales ratio during the 2000 fiscal year. This can be attributed to it change in pricing strategy and introduction of policies that were aimed at controlling operating costs. It is important that the company moves fast to control its costs if it is to sustain its profitability in the future. The forecasts highlight major issues facing the company.
The company is facing real issues. Similarly, there are some assumptions made in the formulation of the forecasts that were mainly meant to safeguard the interests of the shareholders in the short-run. The dividends in the forecasts have been maintained at a consistently high rate despite the challenges facing the company. It would have been prudent for the company to consider decreasing the short-term dividend payments to its shareholders and channel these funds toward supporting the company`s profitability and longevity especially at this difficult time.
Pundir proposes that dividend payments to the 11 shareholders each quarter should be INR 500,000. This implies a distribution of INR 2,000,000 per year. From the income statement, the company had a net profit of INR 2, 550,837 in 2000. Deducting the payments to shareholders, the company only remains with 550,837 to cater for all its operational expenses. The cash that should be maintained at the start of 2001 is 750,000 implying that there is already a shortage of 199,163 which has to be borrowed for the company to continue operating.
The business is equally facing significant sustainability challenges. Ms. Pundir tends to place heavy emphasis on the company`s shareholders than on the short-term liquidity and projected needs of the company. The management style that Ms. Pundir uses largely passes responsibility to the subordinates. To address the current surprising liquidity challenges, Ms. Pundir must do an organization-wide audit before she makes any decisions. She must identify the exact causes of the problem. Recommendations Ms.
Pundir is confronted with the challenge of addressing a unique cash shortage and this has to be done immediately. One of Ms. Pundir`s major problems is that she excessively delegates duties to the subordinates. Before delegating any duty, it is important that she carries out a comprehensive assessment of Kota`s financial position. It is evident that Ms. Pundir puts more emphasis on the profits that go to stockholders rather than the company`s liquidity position and projections for the future. As a way of assisting Ms. Pundir in addressing the situation, a number of recommendations can be helpful.
As a whole, the projections indicate that Kota Fibres limited is performing well in managing their financial assets. However, the company is facing some challenges in the area of liquidity management. This implies that unless urgent measures are undertaken the company may not be in a position to pay its bills on time and successfully transform its assets into cash if they rely on the 2001 projections. In terms of accounts payable, asset turnover and accounts receivable Kota Fibres is doing well. However, there is a problem with the long credit term of 80 days that Ponticherry Textiles requested.
This will adversely impact on the business because it will further worsen the company`s liquidity position by reducing its available cash during the year and increase the company`s liabilities because of the extended credit term. Under this circumstance, it is advisable that Kota Fibres rejects this memo as it will have an adverse effect on the effect. Given that the company is already suffering from short term liquidity challenges, tying up additional cash in receivables will worsen the situation and Kota will not even be in a position to repay its loan at All-India bank before December.
The other two proposals from the Purchasing Agent and the Transportation Manager respectively should be approved. If the company manages to its finished goods inventory and raw material inventory then less inventory will be reported in the company`s financial statements. This will boost the firm`s liquidity position given that inventory is among the less liquid assets. Similarly, it is clear that the company is inefficient in using its assets to generate sales. This is the main reason why there is a shortage of cash in hand. To address this problem, Kota Fibres should increase its total assets.
Similarly, the company`s debt-to equity ratio, presents another avenue through which the company can boost its cash on hand. The 2001 financial projections fully address this area and should as a result be implemented. There is need for the company rethink before they embrace the 2001 projection as a strategy for generating profits. It is clear that the company will suffer from reduced profitability if this plan is executed. There is equally an urgent need for the company to enhance it operating efficiency and reduce its levels of debt.
This is the only way through which it can boost its bottom line thereby make both its creditors and stockholders happy. Finally, Ms. Pundir’s should engage the stockholders in seeking a lasting solution to the company`s problems. It the shareholders are involved, perhaps they will propose different alternatives rather than Ms. Pundir’s main aim of maximizing the wealth of the shareholders. If the shareholders understand the worrying situation the company is in, they may opt to reinvest a significant amount of the company`s profits which will benefit them in the long-term.
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Kota Fibres Ltd Case Analysis. (2018, Feb 07). Retrieved from https://phdessay.com/kota-fibres-ltd-case-analysis/
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