Kota Fibres, Ltd. Case

Kota Fibres, Ltd. is a small firm located in Kota, India. Utilizing domestic raw materials and advancing technology Kota supplied synthetic fiber yarn to domestic textile mills. Kota Fibres, Ltd. now is facing a problem of cash shortage, and the company upsetting its banker, its truck drivers, and its yarn customers. In addition, it faces a complex situation. Therefore, the purpose of this assignment is to help Kota Fibres gets over from the difficult position by analyze the company’s current situation.

Firstly, by analyzing Exhibit 2 - Historical and Forecast Annual Income Statements, I can see that there are three reasons on cash shortage: sales growth, declining profitability, and aggressive dividend. Exhibit 2 shows that the net sales increase to INR 77 million in 2001 from INR 64 million of 2000. Cost of goods sold rises by INR 13 million. Thus, the gross profits in 2001 is INR 10.3 million which is 0.3 million less than the year of 2000. Although the gross profit is no changed a lot, the net profit dropped dramatically because of high operating expenses and interest expenses. Net profit in 2001 is supposed to decrease INR1.3 million. In 2001, the firm earned a return on equity is 11.9%. This is 9.6% lower than the return on equity in 2000, and which is also below the bank’s interest rate.

In this situation, Kota Fibres has to borrow money to pay the excise tax that permits the company’s goods to leave the loading dock. However, the bank would not lend funds to Kota since the firm is unable to clean up its debt balance for 30 days during this past off-season and there is no more cash now. Also, the bank cannot wait for Kota to convert its seasonal accounts receivable and inventory back into cash. Therefore, there is no doubt to result a vicious circle to Kota. Failure to ship goods leads to customers’ loses, and which then leads to a loss of firm’s profit.

Moreover, Kota’s financial requirements vary across the year because the demand for...