1. What is the current situation? Why did the company run out of cash? What are the consequences for the company?

2. What does Malik’s financial forecast show? How was the forecast constructed?

3. What are Kumar’s alternatives for action? What impact might the two proposals have on the financial needs of the firm?

4. What action should Kumar take?

In January 2012, the chief executive of a small yarn-production company in India must resolve an unexpected cash shortage. The task for the student is to evaluate the causes of this shortage (using a completed “base-case” forecast given in the case) and assess the usefulness of various possible remedies suggested by managers. The company is unable to liquidate a seasonal working-capital loan for the requisite 30 days each year, a difficulty arising from two classic causes: secular growth of the company and declining profitability. Possible remedies include reducing inventory through more efficient transportation and warehousing, reducing credit terms to customers, switching from seasonal to level production, improving profitability, decreasing dividends, and reducing sales growth. The objectives of the case are threefold:

• To explore a range of issues in working-capital management, with a primary focus on accounts receivable and inventory. The case illustrates how management choices about trade credit, inventory policy, production policy (i.e., producing to order versus producing to stock), and expense management influence the financing needs of the firm. The case’s financial forecast gives students the opportunity to discuss the cash cycle of the firm.
• To extend students’ skills in financial-statement modeling and analysis. This case demonstrates the technique of forecasting with T-accounts, which may be contrasted with percentage-of-sales forecasting illustrated in other cases.
• To illustrate some of the challenges in the financial (and general) management of firms in developing countries. These challenges include transportation and logistical problems, the availability of credit to merchants and consumers, high real rates of growth, tax practices of governments, and dramatic swings in demand induced by local customs and holidays.