Kota Fibre Ltd

Kota Fibre, Ltd. was a small firm founded in 1962 and located in Kota, India. It supplied synthetic fiber yarns used to weave colorful cloths for making saris, the traditional women’s dress of India. The average Indian woman purchase 3 saris a year, each sari averages eight yards of cloth and given the female Indian population of 500 million the demand is about 12 billion yards of fabric. With a demand of 12 billion yards of fabric per year needed to be supplied by Kota’s provides a stable growth for business.

Kota Fibres had a line of credit at the All-India Bank & Trust Company and before granting a loan to pay the excise tax, the branch manager of All-India had requested a meeting with Pundir the next day. Kota’s cleanup requirement to the bank is in October but last time, they had failed to make full repayment on time and even after the bank agreed to extend the clean up until November and December, Kota’s credit needs still did not abate as rapidly as expected. Now, the bank was refusing to extend any more seasonal credit until Pundir presented a reasonable financial plan for the company that demonstrated its ability to clean up loan by the end of 2001.

Analysis

Kota Fibres, Ltd. now is facing a problem of cash shortage. Consequently, the company upsetting its banker, its truckers, and its yarn customers; it sinks in a complex situation. In order to help Kota Fibres shakes off from the predicament, we firstly aim to analyze the company’s current situation to find out the reasons.

By analyzing the case Exhibit 2 – Historical and Forecast Annual Income Statements, we conclude that there are three reasons on cash shortage: sales growth, declining profitability, and aggressive dividend. Exhibit 2 shows that the net sales increase to INR76 million in 2001 from INR64 million of 2000. Cost of goods sold rises by IRN 13 million. Thus, we get the gross profits in 2001 is INR10.3 million which is 0.3 million less than the year of 2000. Although the...