KOTA FIBRES LTD . NK . Funder , the managing director and principal owner of Kata Fibres . Lid . discovered the problem when she arrived at the parking lot of the company's plant one morning in early January* 20101 . Trucks Filled with rolls of fiber you're 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 " cash payment , but in seeking to draw funds for the excise tax that morning . Mr. Mehta , the bookkeeper , discovered that the company had overdrawn it's 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 & 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 it's 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 Hacky round Kota Fibres . Lid . was founded in 1962 to produce nylon fiber at its only plant in Kota India . `hour 1 0 kilometers Ikn't 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* Ivpically would buy three saris a year . With India's female population at around 509 million , the demand for sirEs accounted for more than 1 2 billion wards of fabric . This demand was currentlybeing supplied entirely from domestic Textile mills that in turn , filled their yam requirements from suppliers such a Koll Fibre. Synthetic _ Textile Market* "The demand for synthetic textile wan stable with year - ko- veur growth and predictable seasonal fluctuations . Unit demand increased with both population and national income . In addition , India's population celebrated hundred's of festival 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 & seasonal peak in demand for nylon textiles in late summer and early fall . Thus , the seasonal demand for mylan warn would peak in mid - summer . Unit growth in the industry was expected to be 19'6 per year . I`msumers purchased marks and textiles from cloth merchant located in the villages around the country . A cloth merchant was an important local figure usually we'll known to area residents . the merchant generally granted credit to support consumer purchases . Merchants maintained relatively Low level of inventory and built stacks of Fondly only shortly in advance of and during the peak selling season . Competition aning suppliers like many small Lexlike - weaving milk ; to those merchant was keen and was affected by price , service and the credit that the mills could Front to the merchants . The mills essentially produced to ander , building their inventories of woven cloth shortly in advance of the peak selling chon and keeping only maintenance* Strike at walker lines of the Year . The Vam manufacturers competed for the business of the mill through responsive {nvice and credit . The suppliers In the Damn manufacturers provided little or no trade credit . HEing near the origin of the textile cham in India , The yarn manufacturers Essentially bankall the downstream activities of the industry .Production and Distribution System Thin profit margins had prompted Pundit In sunlight policies against over production and! The ruleking . which would require Kill In carry inventories through the slack selling season . She had adopted & plan of seasonal production , Which me ant that the vari plant would `` rate at peak capacity for two months of the wear and at molest level the rest of the Year . That policy injured and annual ritual of hirings and loyalty . To help Ensure prompt Service , Kala Fibres mizzinmainall It's distribution warehouses . but getting the finished jam quickly from the factory in Kala to the customers Will ^ challenge . The rounds were many and molly in print repair .* truck could take 10 10 15 days In negotiate the trip between Calculus and Kate . " distance of about I. IT kin, and Except when they passed through cities and his have had only one lane . When Ing cars or trucks art , they had to show thrown and squeeze just Each other In the stop and wait for krithic to guess. Jaunty's wer show and dangerous, and accidents were frequentCompany Performance Kala Fibres had been consistently profitable. Moreover , Likes had grown at $in annual rate of 1``` in the Year Full. Lines Sales were projected In reach ! Indian rupees ! INKIWI. 4 million in the fiscal year that ended December 31. { All ( see Exhibit 11. Net profits reached INK _. 6 million in 201 . Exhibit = = and & present recent financial Statement s for the film .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. At the time, the rupee was pegged to the U.S. dollar at the rate of 46.5 rupees per dollar.Kata 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%6 , but Michiting was worried That inflation and interest rates might rise in the coming year . The seminal line of credit had to be cleaned up for at least 3/1 days each year . The usual cleanup month had been October , ] but Kala Fibres had failed to make a full repayment at that time . Only after strong* assurances by Funder that she would clean up the Loan in November or December hind the bank lending officer reluctantly agreed to waive the cleanup requirement in October . Unfortunately . The credit needs of Kola Fibres did not share 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 kan by the end of 201 . Financial Forecast Akchin hurrially developed a monthly forecast of financial statements wing the current operating* `tingtings face Inhibit &j. As an alternative way of looking at the Forecasted fund flows , Michel along required a Torrent of Lish receipts and dish ure ments II. shihit " I. The monthly T_accounts underlying the* forecasts an given in Inhibit I'll, and a summary of the forecast assumptions is in Exhibit 1 1 .` Mehta handed over the forecast In Pundir with a graph showing projected sales and lininth- end debt outstanding IF thihit 121. After studying the forecasts for a few moments . I'under 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 its " basis for more credit . We lived a new plan , and fast . W/'s need these loans in order to scale up for the most important part of" our hummers samson Let's go out there assumptions in detail and look for any opportunities In` improve our debt position . "Then casting her gaze toward the stack of men's she had pushed aside earlier . she muttered . " Pentup some of the s proposals will help . " - The selection of ClintIT Is the loan-Cleanup month was injured by the bank on the grounds of tradition Sesqui!* lounge of any tips made by the bank were to be cleaned up in October . Funder had seen In neon previously to chilling's the hank's tradition .Exhibit !' KOTA HERE'S LTD. Summary of Monthly Sales . Actual for Land and Forecast for 20101 ( in rupees ! 2000 2001 [ historical! (forecast! January" 2.012. 400 2.616, 120 February" 2.314.260 Which 3. 421.090 April 7.043. 400 $, $0.4. 250 May 12, 074 400 13, BB5, 5.50 June 15, 204.240 July 14. 187. 420 16. 315.53.3 August 7. 144.020 $.572, $24 $.024.090 5. 031, 000 October 3, 421.090 $, $47, 404 NOVEMBER 2.716. 740 3. 531, 762 2. 167. 050 15, BET. 480 70, 20 0, 108- 16- Exhibit 10 (continued) January February March Agill May June July Auguil September October November Thorring d Pedod 11 161, it G74,120 11,509 534 10101 023 11,10 218 12, 501 3607 12,109, 541 12081, 04 hiat Prodi 101410 200000 520, 10 500 000 Ord ofPedal 11 274 130 10 013 14124 509 12501,397 12 04 085 12, 109 341 12021, 404 11 1 12,62 & Schedul of AcrudTana Tognring d Pedod (147,190 Montly Taa Gap. goon un: Outaly ha Pagrana DO 400 To 00 DO RTTO DO DO Ord ofPedal (AT 190 (100, 140 191.41) 130140 DO 1010 200 4. Schedule of Pro party, Plant & Equipments laginring Goun PPLE 1045 04 11 145. Cid 11,145 06 320010 320, 00 2000 12000 Creing Goas PPL 10, 445 040 19 445040 11,145 040 11 145, 040 11,145, GIG Monthly dop Cp 04,1.30 HIT DIT RT OIT BEL THT Lam Cursidive Dep 2. RTC451 2402, 218 Ereiing hit PPAE 8443,107-15- Exhibit 10 KOTA FIBRES, LTD. Forecast T-Accounts Supporting Financial Statements ( in rupees) Fab Ap May June Sept Oct Schedule of Axouni receivthy Beginning of Perlod 17,191,10 2016120 4447404 10315 50 1572 10 R. TOT 030 Laus Collection Liat Month ( 1 157,150 2,521 700 2012400 1,412 702 Lags Coledin Northbelow 12 004 End of pedal 5012144 IT, 87, 155 IT 191,109 3, 715 152 adedied inandria Beginningof Parked 1T,45, 315 1, PineIT Later BITASO Lase Shipment COGS) 2132 00 ARTT TIT 10 27 050 12 032, 540 3.TOT, ARTT TT Endof pedal Schedule of Axouni Payalis Beginning of Parked 40108is 1825 1110 30 + Purchas 2.TT.0D End of Period 101450 4010 1 142 024 1014 50 1,110 20 1009 0OT ton of Gold inperiodiT-2 Equ token of thes in pad od (T+2 Equ to ton of mine in palod(T+2 Equ lopurdaa iparke (T-1)- 17 - Exhibit !1! KOTA FIBRES. LTD . Forecast Assumptions Hallo of : Income Tax,Profit Before Tax 3096 Excise Tax Sales 15% This Month Collections of Last Month's Sales 40%6 This Month Collections of Month - before - Last Sales 60% Purchases / Sales two months later* 5:596 Wages Purchases 3496 Annual Operating Expenses' Annual Sales 6. 00 96 Capital Expenditures ( every third month )* 350, 000 Interest Rate on Borrowings ( and deposits ) 14.596 Minimum Cash Balance* 7:50, 000 Depreciation , Gross PP &E ( per year ) 10%6 ( per month ) 0. 8.396 Dividends Paid ( every third month ! 500, 000-18- Exhibit 12 KOTA FIBRES, LTD. Trend of Certain Financial Accounts by Month (in millions of rupees) 35,000,000 30,000,000 25,000,000 20,000,000 AR 15,000,000 AP np 10,000,000 5,000,000 0 January February March May August September October November-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 53,865,91 1 66,993,380 Gross Profits 10,317,978 10,621 A47 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- 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 ( 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-^ Exhibit + KOTA HAKES LTD . Memm from Field Sales Manager G. Pundir From A. Bajmal January ]. ]IN`! As you know , Pondicherry Textiles is considering making Is their prime Yarn supplier for this year . Purchases would be in the neighborhood of INK G 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 $1! days , net. Unless we extend our credit terms . Pondicherry will not do business with us. We can expect that Pondicherry will purchase our yan across the year in about the same puller'n in our other customers . If you approve this exception to our standard terms 1 45 days) . the Pondicherry district* sales office will meet its quarterly sales quota immediately . Please indicate your approval below . Approved .Exhibit*} KOTA FLUKES. LIU . Memo from Transportation Manager G . Funding From K. Sikh January 2. 20^1 As You asked me to . I have been trucking our supply shipments in the last six months . The new Bowl between Kala 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 Ihill we reduce our Law _ material inventory requirement from All day to All days This would reduce the amount of inventory we lle 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 call implement this in January .Exhibit ` KOTA FLUKES L'IN Memo from Purchasing Agent G . Funding R. Mahan January 5. 2IN1 Hibachi Chemicals of Yokohama has approached us with a proposal In supply us with polyester pellets on a"just- in - time" basis from their plant in Majal 120 kin 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 bank_ and will report back in two weeks . If the proposal is Feasible . it would reduce our Inventory of pellets from All days outstanding In only Zor } dings- 1 1 - Exhibit ? KOTA HIKES. LIN . Alean from Operations Manager G . Funding From 1. Gupta January ]. ZINI I'mu asked me to estimate the production efficiencies arising from a scheme of level annual production . In essence , there are significant advantages to he gained .* Gross profit margin would rise by 286 or 796, 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 Lyjolts would no longer be necessary, permitting us In cultivate ` stronger work force and , perhaps , In suppress labor unrest . You will re call that the unions* have indicated that reducing seasonal lavalt's will be one of their major negotiating* objectives this year . Level production entails lower manufacturing risk . With the had spread throughout the year , we would suffer less from equipment breakdowns and could beller match the routine maintenance with the demand on the plant and equipment . Exhibits KOTI HARKS, LTD . Schedule of Cash Receipts and Disbursement's for 20^!` \in rupees ) March HEMI May July HE THE SA^` 24 4\72\ 412TH FETTIGE REMIBOT* 2707.050 2.94202} $701 .1010 17. 419179 20 197.5^ 12 950. 04.5\ \BARZAN 5.0120 10 3.210 051\ 1. 41707 2515 SUU {}HE'D ZIZHIT 15 HES!` LIVULL JULY. !YA BYEGENE THUIVIZH TIMBAL PISBUSH* 1578 178 5959. 108\ \57014TO HUSH. NO GALATI MISOBAID HIZIGE 15:1 19 4 2 HAOR ARE TIN JETIBUY $ 17 513 $715059 27ETOSO\ 241.072 Call E panditune 350 010 TOBAT 150210 202 147 145 {`^ HOE`` 407.79 Entia Tax Paid 7:540.50 $15:054 45-450 0 $ 45010 454501 $4501\ 45450% $ 450 0 45 4501 45450 105 +5+ 2927 70 541 {` BULGES LEX ]IS 25^`BOO 320103 1:051.015 HOTIT BYLEE 517.4'341 $ 500 010 500 0 09 500 0 0^ 2901 14} $ MOTH $5#1. 210 12. 1870 05 15 7ed DOLE TO^ ^` Z $501.214 STOTAN 5715 556\ 750.0100 7:50. 0010 750 0 00 [OF Catch Biling` 750 010 750.0100 7:50.0100 750 010 750.000 750 0.00 750 0.09 750.0 00 750 0 0^ (19 Equal to 55 Fu ant of Like how bad IT + 2` ( Equal to purchase in punON IT . TL