1. KOTA FIBRES LTD.
Ms. Pundir, the managing director and principal owner of Kota Fibres, Ltd., discovered the
problem when she arrived at the parking lot of the company’s plant one morning in early January
2001. Trucks filled with rolls of fiber yarns were being unloaded, but they had been loaded just the
night before and had been ready to depart that morning. The fiber was intended for customers who
had been badgering Pundir to fill their orders in a timely manner. The government tax inspector,
who was stationed at the company’s warehouse, would not clear the trucks for departure because the
excise tax had not been paid. The tax inspector required a cash payment, but in seeking to draw
funds for the excise tax that morning, Mr. Mehta, the bookkeeper, discovered that the company had
overdrawn its bank account again—the third time in as many weeks. The truck drivers were
independent contractors who refused to wait while the company and government settled their
accounts. They cursed loudly as they unloaded the trucks.
This shipment would not leave for at least another two days, and angry customers would no
doubt require an explanation. Before granting a loan with which to pay the excise tax, the branch
manager of the All-India Bank & Trust Company had requested a meeting with Pundir for the next
day to discuss Kota’s financial condition and its plans for restoring the firm’s liquidity.
Pundir told Mehta, “This cash problem is most vexing. I don’t understand it. We’re a very
profitable enterprise, yet we seem to have to depend increasingly on the bank. Why do we need more
loans just as our heavy selling season begins? We can’t repeat this blunder.”
Company Background
Kota Fibres, Ltd., was founded in 1962 to produce nylon fiber at its only plant in Kota, India,
about 100 kilometers (km) south of New Delhi. By using new technology and domestic raw
materials, the firm had developed a steady franchise among dozens of small, local textile weavers. It
supplied synthetic fiber yarns used to weave colorful cloths for making saris, the traditional
women’s dress of India. On average, each sari required eight yards of cloth. An Indian woman
typically would buy three saris a year. With India’s female population at around 500 million, the
demand for saris accounted for more than 12 billion yards of fabric. This demand was currently
2. -2-
being supplied entirely from domestic textile mills that, in turn, filled their yarn requirements from
suppliers such as Kota Fibres.
Synthetic-Textile Market
The demand for synthetic textiles was stable with year-to-year growth and
predictable seasonal fluctuations. Unit demand increased with both population and
national income. In addition, India’s population celebrated hundreds of festivals each
year, in deference to a host of deities, at which saris were traditionally worn. The most
important festival, the Diwali celebration in mid-autumn, caused a seasonal peak in the
demand for new saris, which in turn caused a seasonal peak in demand for nylon textiles
in late summer and early fall. Thus, the seasonal demand for nylon yarn would peak in
mid-summer. Unit growth in the industry was expected to be 15% per year.
Consumers purchased saris and textiles from cloth merchants located in the
villages around the country. A cloth merchant was an important local figure usually well
known to area residents; the merchant generally granted credit to support consumer
purchases. Merchants maintained relatively low levels of inventory and built stocks of
goods only shortly in advance of and during the peak selling season.
Competition among suppliers (the many small textile-weaving mills) to those
merchants was keen and was affected by price, service, and the credit that the mills could
grant to the merchants. The mills essentially produced to order, building their inventories of
woven cloth shortly in advance of the peak selling season and keeping only maintenance
stocks at other times of the year.
The yarn manufacturers competed for the business of the mills through responsive
service and credit. The suppliers to the yarn manufacturers provided little or no trade credit.
Being near the origin of the textile chain in India, the yarn manufacturers essentially banked
the downstream activities of the industry.
Production and Distribution System
Thin profit margins had prompted Pundir to adopt policies against overproduction and
overstocking, which would require Kota to carry inventories through the slack selling season.
She had adopted a plan of seasonal production, which meant that the yarn plant would
operate at peak capacity for two months of the year and at modest levels the rest of the year.
That policy imposed an
annual ritual of hirings and layoffs.
To help ensure prompt service, Kota Fibres maintained two distribution warehouses,
but getting the finished yarn quickly from the factory in Kota to the customers was a
challenge. The roads were narrow and mostly in poor repair. A truck could take 10 to 15 days
to negotiate the trip between Calcutta and Kota, a distance of about 1,100 km, and except
when they passed through cities and highways had only one lane. When two cars or trucks
met, they had to slow down and squeeze past each other or else stop and wait for traffic to pass.
Journeys were slow and dangerous, and accidents were frequent.
3. Company Performance
Kota Fibres had been consistently profitable. Moreover, sales had grown at an
annual rate of 18% in the year 2000. Gross sales were projected to reach (Indian rupees)
INR90.9 million in the fiscal year that ended December 31, 2001 (see Exhibit 1).1 Net
profits reached INR2.6 million in 2000. Exhibits 2 and 3 present recent financial
statements for the firm.
Reassessment
After the episode in the parking lot, Pundir and her bookkeeper went to her office to
analyse the situation. She pushed aside the several items on her desk to which she had intended
to devote her morning: a letter from a field sales manager requesting permission to grant
favorable credit terms to a new customer (see Exhibit 4); a note from the transportation manager
regarding a possible change in the inventory policy (Exhibit 5); a proposal from the purchasing
agent regarding the delivery lead times of certain supplies (Exhibit 6); and a proposal from the
operations manager for a scheme of level annual production (Exhibit 7).
To prepare a forecast on a business-as-usual basis, Pundir and Mehta agreed on
various parameters. Cost of goods sold would run at 73.7% of gross sales—a figure that
was up from recent years because of increasing price competition. Operating expenses
would be about 6% of sales— also up from recent years to include the addition of a
quality-control department, two new sales agents, and three young nephews with whom she
hoped to build an allegiance to the Pundir family business. The company’s income tax rate was
30% and, although accrued monthly, was actually paid quarterly in March, June, September, and
December. The excise tax (at 15% of sales) was different from the income tax and was collected
at the factory gate as trucks left to make deliveries to customers and the regional warehouses.
Pundir proposed to pay dividends of INR500,000 per quarter to the 11 members of her extended
family who held the entire equity of the firm. For years Kota had paid high dividends. The Pundir
family believed that excess funds left in the firm were at greater risk than if the funds were
returned to shareholders.
Mehta observed that sales collections in any given month had been running
steadily at the rate of 40% of the last month’s sales plus 60% of the sales from the month
before last. The value of the raw materials purchased in any month represented on
average 55% of the value of sales expected to be made two months later. Wages and
other expenses in a given month were equivalent to about 34% of purchases in the
previous month. As a matter of policy, Pundir wanted to see a cash balance of no less
than INR750,000.
1
At the time, the rupee was pegged to the U.S. dollar at the rate of 46.5 rupees per dollar.
4. Kota Fibres had a line of credit at the All-India Bank & Trust Company, where it also
maintained its cash balances. All-India’s short-term interest rate was currently 14.5%, but Mehta
was worried that inflation and interest rates might rise in the coming year. The seasonal line of
credit had to be cleaned up for at least 30 days each year. The usual cleanup month had been
October,2 but Kota Fibres had failed to make a full repayment at that time. Only after strong
assurances by Pundir that she would clean up the loan in November or December had the bank
lending officer reluctantly agreed to waive the cleanup requirement in October. Unfortunately,
the credit needs of Kota Fibres did not abate as rapidly as expected in November and December,
and although his protests increased each month, the lending officer agreed to meet Kota’s cash
requirements with loans. Now he 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
the loan by the end of 2001.
Financial Forecast
Mehta hurriedly developed a monthly forecast of financial statements using the current operating
assumptions (see Exhibit 8). As an alternative way of looking at the forecasted fund flows, Mehta also
prepared a forecast of cash receipts and disbursements (Exhibit 9). The monthly T-accounts underlying the
forecasts are given in Exhibit 10, and a summary of the forecast assumptions is in Exhibit 11.
Mehta handed over the forecast to Pundir with a graph showing projected sales and
month-end debt outstanding (Exhibit 12). After studying the forecasts for a few moments,
Pundir expostulated:
This is worse than I expected. The numbers show that we can’t repay All- India’s loan by
the end of December. The loan officer will not accept this forecast as a basis for more credit. We
need a new plan, and fast. We need those loans in order to scale up for the most important part of
our business season. Let’s go over these assumptions in detail and look for any opportunities to
improve our debt position.
Then, casting her gaze toward the stack of memos she had pushed aside earlier, she muttered,
“Perhaps some of these proposals will help.”
2 The selection of October as the loan-cleanup month was imposed by the bank on the grounds of tradition. Seasonal
loans of any type made by the bank were to be cleaned up in October. Pundir had seen no reason previously to
challenge the bank’s tradition.
5. -5-
Exhibit 1
KOTA FIBRES, LTD.
Summary of Monthly Sales,
Actual for 2000 and Forecast for
2001 (in rupees)
2000 2001
(historical) (forecast)
January 2,012,400 2,616,120
February 2,314,260 2,892,825
March 3,421,080 4,447,404
April 7,043,400 8,804,250
May 12,074,400 13,885,560
June 15,294,240 17,588,376
July 14,187,420 16,315,533
August 7,144,020 8,572,824
September 4,024,800 5,031,000
October 3,421,080 4,447,404
November 2,716,740 3,531,762
December 2,213,640 2,767,050
Year 75,867,480 90,900,108
6. -6-
Exhibit 2
KOTA FIBRES, LTD.
Historical and Forecast Annual Income Statements
(in rupees)
1999 2000 2001
(Actual) (Actual) (Forecast)
Gross Sales 64,487,358 75,867,480 90,900,108
Excise Tax 9,673,104 11,380,122 13,635,016
Net Sales 54,814,254 64,487,358 77,265,092
Cost of Goods 44,496,277 53,865,911 66,993,380
Gross Profits 10,317,978 10,621,447 10,271,712
Operating Expenses 3,497,305 4,828,721 5,454,006
Depreciation 769,103 908,608 1,073,731
Interest Expense 910,048 1,240,066 1,835,620
Profit Before Tax 5,141,521 3,644,052 1,908,355
Income Tax 1,542,456 1,093,216 572,506
Net Profit 3,599,065 2,550,837 1,335,848
7. -7-
Exhibit 3
KOTA FIBRES, LTD.
Historical and Forecast Balance Sheets
(in rupees)
2000 2001
(Actual) (Forecast)
Cash 762,323 750,000
Accounts Receivable 2,672,729 3,715,152
Inventories 1,249,185 2,225,373
Total Current Assets 4,684,237 6,690,525
Gross PP&E 10,095,646 11,495,646
Accumulated Depreciation 1,484,278 2,558,009
Net PP&E 8,611,368 8,937,637
Total Assets 13,295,604 15,628,161
Accounts Payable 759,535 1,157,298
Notes to Bank (Deposits at Bank) 684,102 3,463,701
Accrued Taxes 0 (180,654)
Total Current Liabilities 1,443,637 4,440,345
Owners' Equity 11,851,967 11,187,816
Total Liabilities and Equity 13,295,604 15,628,161
8. -8-
Exhibit 4
KOTA FIBRES, LTD.
Memo from Field Sales Manager
To: G. Pundir
From: A. Bajpai
January 7, 2001
As you know, Pondicherry Textiles is considering making us their prime yarn
supplier for this year. Purchases would be in the neighborhood of INR 6 million and are
not reflected in our current sales forecast. Pondicherry would be one of our largest
accounts. They have accepted our terms on price, but have asked for credit terms of 80
days, net. Unless we extend our credit terms, Pondicherry will not do business with us.
We can expect that Pondicherry will purchase our yarn across the year in about the same
pattern as our other customers.
If you approve this exception to our standard terms (45 days), the Pondicherry district
sales office will meet its quarterly sales quota immediately. Please indicate your approval
below.
Approved:
9. -9-
Exhibit 5
KOTA FIBRES, LTD.
Memo from Transportation Manager
To: G. Pundir
From: R. Sikh
January 2, 2001
As you asked me to, I have been tracking our supply shipments in the last six
months. The new road between Kota and New Delhi has improved reliability of the
shipments significantly. Our supplier’s new manufacturing equipment is now running
consistently, and they have been meeting their shipment dates consistently. As a result,
I would propose that we reduce our raw-material inventory requirement from 60 days
to 30 days. This would reduce the amount of inventory we are carrying by one month,
and should free up a lot of space in the warehouse. I am not sure if that will affect any
other department since we will be buying the same amount of material, but it would
make inventory tracking a lot easier for me. Please let me know so we can implement
this in January.
10. -10-
Exhibit 6
KOTA FIBRES, LTD.
Memo from Purchasing Agent
To: G. Pundir
From: R. Mohan
January 5, 2001
Hibachi Chemicals of Yokohama has approached us with a proposal to supply us with polyester
pellets on a “just-in-time” basis from their plant in Majala (20 km away). Those pellets account
for 35% of our raw - material purchases. I am looking into the feasibility of this scheme—in
particular, whether Hibachi can actually perform on that basis—and will report back in two
weeks . If the proposal is feasible, it would reduce our inventory of pellets from 60 days
outstanding to only 2 or 3 days
11. -11-
Exhibit 7
KOTA FIBRES, LTD.
Memo from Operations Manager
To: G. Pundir
From: L. Gupta
January 7, 2001
You asked me to estimate the production efficiencies arising from a scheme of level annual
production. In essence, there are significant advantages to be gained:
• Gross profit margin would rise by 2% or 3%, reflecting labor savings and production
efficiencies gained from a stable work force and the absence of certain seasonal training
and setup costs.
• Seasonal hirings and layoffs would no longer be necessary, permitting us to cultivate a
stronger work force and, perhaps, to suppress labor unrest. You will recall that the unions
have indicated that reducing seasonal layoffs will be one of their major negotiating
objectives this year.
• Level production entails lower manufacturing risk. With the load spread throughout the
year, we would suffer less from equipment breakdowns and could better match the routine
maintenance with the demand on the plant and equipment.
12. -12-
Exhibit 8
KOTA FIBRES, LTD.
Monthly Forecast of Income Statements and Balance Sheets for 2001
(in rupees)
January February March April May June July August September October November December
Gross Sales 2,616,120 2,892,825 4,447,404 8,804,250 13,885,560 17,588,376 16,315,533 8,572,824 5,031,000 4,447,404 3,531,762 2,767,050
Excise Taxes 392,418 433,924 667,111 1,320,638 2,082,834 2,638,256 2,447,330 1,285,924 754,650 667,111 529,764 415,058
Net Sales 2,223,702 2,458,901 3,780,293 7,483,613 11,802,726 14,950,120 13,868,203 7,286,900 4,276,350 3,780,293 3,001,998 2,351,993
Cost of Goods
Sold 1,928,080 2,132,012 3,277,737 6,488,732 10,233,658 12,962,633 12,024,548 6,318,171 3,707,847 3,277,737 2,602,909 2,039,316
Gross Profit 295,622 326,889 502,557 994,880 1,569,068 1,987,486 1,843,655 968,729 568,503 502,557 399,089 312,677
Operating
Expenses 454,501 454,501 454,501 454,501 454,501 454,501 454,501 454,501 454,501 454,501 454,501 454,501
Depreciation 84,130 84,130 87,047 87,047 87,047 89,964 89,964 89,964 92,880 92,880 92,880 95,797
Interest Expense (Income)
(1) 11,058 24,825 70,867 158,210 268,352 362,187 363,212 259,568 145,898 80,686 50,025 40,731
Profit Before
Taxes (254,068) (236,566) (109,858) 295,123 759,168 1,080,835 935,979 164,697 (124,776) (125,510) (198,317) (278,352)
Income Taxes (76,220) (70,970) (32,957) 88,537 227,751 324,251 280,794 49,409 (37,433) (37,653) (59,495) (83,506)
Net Profit (177,847) (165,596) (76,900) 206,586 531,418 756,585 655,185 115,288 (87,343) (87,857) (138,822) (194,847)
(1) Interest expense = Notes Payable * 14.5%/12 months.
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13. -13-
Exhibit 8 (continued)
January February March April May June July August September October November December
Assetsis
Cash (1) 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000 750,000
Accounts Receivable (2) 2,773,349 3,291,542 5,012,144 10,301,737 17,997,155 24,748,757 25,697,603 17,191,189 9,003,739 6,295,049 5,029,249 3,715,152
Inventories (3) 2,308,135 5,850,125 11,855,841 17,637,315 19,666,227 14,469,652 6,815,272 3,883,970 2,950,257 1,854,837 1,639,892 2,225,373
Not
Total Current Assets 5,831,484 9,891,667 17,617,985 28,689,052 38,413,382 39,968,409 33,262,875 21,825,159 12,703,996 8,899,886 7,419,142 6,690,525
NetforProp. Plant & Equip. (4) 8,527,237 8,443,107 8,706,060 8,619,013 8,531,966 8,792,002 8,702,038 8,612,075 8,869,194 8,776,314 8,683,434 8,937,637
Total Assets 14,358,721 18,334,774 26,324,045 37,308,065 46,945,348 48,760,411 41,964,914 30,437,233 21,573,190 17,676,200 16,102,575 15,628,161
.
Liabilities and Owners' Equity
Accounts Payable (5) 1,614,553 4,010,818 6,805,539 8,842,088 8,142,024 3,883,534 1,935,531 1,614,553 1,110,950 690,358 1,039,007 1,157,298
Note Payable- Bank (6) 1,146,268 2,962,622 8,767,030 17,419,379 26,997,556 32,950,665 27,167,192 15,795,793 8,352,899 5,002,010 3,278,054 3,463,701
Accrued Taxes (7) (76,220) (147,190) (180,148) (91,611) 136,140 0 280,794 330,203 0 (37,653) (97,148) (180,654)
Total Current Liabilities 2,684,601 6,826,250 15,392,421 26,169,856 35,275,720 36,834,199 29,383,517 17,740,548 9,463,849 5,654,715 4,219,913 4,440,345
Shareholders' Equity (8) 11,674,120 11,508,524 10,931,623 11,138,209 11,669,627 11,926,212 12,581,397 12,696,685 12,109,341 12,021,484 11,882,662 11,187,816
Total Liabilities & Equity 14,358,721 18,334,774 26,324,045 37,308,065 46,945,348 48,760,411 41,964,914 30,437,233 21,573,190 17,676,200 16,102,575 15,628,161
. .
(1) See Exhibit 9.
(2) See panel 1, Exhibit 10.
(3) See panel 2, Exhibit 10.
(4) See panel 6, Exhibit 10.
(5) See panel 3, Exhibit 10.
(6) Plug figure.
(7) See panel 5, Exhibit 10.
(8) See panel 4, Exhibit 10.
