Kota Fibres

Some Issues to Consider as you read and Analyze Kota Fibres, Ltd.

1. Mehta constructed his financial forecast using current operating assumptions. He also prepared a forecast of their cash receipts and disbursements. Monthly T-accounts and the assumptions given in Exhibit 11 in the case report were the driving factor behind the forecast. The “cash cycle” of the firm was the area of concern that surfaced from the forecast. Mehta and the Pundir family should’ve expected this result though, based upon the situation outlined at the beginning of the case. It is interesting to note that the cash cycle really wasn’t problematic until their “peak” season, when the cash cycle ballooned to 156 days.

2. On the basis of Mehta’s forecast, notes payable would have to increase from 1,146,268 rupees to 3,463,701 rupees by the end of the year to sustain current operations. This is unacceptable because of their current situation with their bank. They will not be able to repay this line of credit without substantial changes because their cash figure is not large enough and additionally their net income also will not allow for them to cover even with using all of it to cover the debt.

3. The key determinants of the variation in their financial requirements and borrowing needs throughout the year are the presence of a peak season, current production/operation practices, India’s infrastructure, an excise tax on shipped goods, and a unaligned payables and receivables terms for suppliers and customers.

4. The Pondicherry request is an interesting situation. While it would certainly raise revenues and net income, it will present the company with additional concerns. The cash cycle and illiquidity of the company will be further hampered with the addition of the Pondicherry account. To specifically answer the question posed in the advanced questions, the effect on accounts receivable and debt balances will both be increased. The level production suggestion...