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Financial Analysis and Forecasting 52-251-02 Case Analysis: Kota Fibres, LTD Part I: Introductions

Analyzing financial situation, forecasting strategies for Kota Fibres LTD facing operational challenges, stakeholders' perspectives included.

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Financial Analysis and Forecasting 52-251-02 Case Analysis: Kota Fibres, LTD Part I: Introductions

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  1. Financial Analysis and Forecasting 52-251-02 Case Analysis: Kota Fibres, LTD Part I: Introductions MBA Intensive 2003 Group: E14 Team:92

  2. Company background • Produced synthetic fiber yarns used in weaving cloth for saris since 1962 • One centralized production plant in Kota, India • Two warehouses for distribution • Using new technologies and domestic raw materials with a steady franchise

  3. Synthetic Textile Market • Stable year-to-year growth • Predictable seasonal fluctuations • High competition between the yarn manufacturers • Differentiation through service and credit • Total potential equivalent to 12 billion yards of fabric

  4. Company Operation • Sales growing steadily 15%-20% • Consistently profitable but with thin margins • Chase production system that involves hiring and layoffs • Kota is far from its customers • No adequate infrastructure for shipping

  5. Problems (1) • Sales are increasing however profits are decreasing • Unable to repay line of credit • Operational problems due to low Liquidity • Customer not getting their deliveries in a timely fashion • Labor unrest due to the current production system

  6. Problems (2) • Collection of Accounts Receivables impacts cash flow • Raw material purchases two months ahead of sales thus increasing the inventory • Wage structure (34% of previous month purchases) leads to huge payments during seasonal peak • Increasing interest rates could worsen the situation • Inventories and A/R are increasing year over year

  7. Options to investigate (1) • Different credit arrangements with current supplier • Different credit policies with customers • Increase collections on A/R by using incentives • Favorable credit terms for new important customers • Relax the 750000 cash balance constraint during seasonal peak

  8. Options to investigate (2) • More efficient manufacturing and delivery process • Change the inventory policy (60 to 30 days) • Delivery lead times of certain supplies (60 to 2-3 days) • Leveled production to reduce costs and labor unrest • Reduce or cut the dividends payouts especially during peak season

  9. Stakeholders • Bank • Customers • Suppliers • Employees

  10. Bank • Sustained growth–want you to succeed • BUT need to secure your loan • Control Cash • High accounts receivable and inventory • Inflation + interest increase - prepared? • Effectiveness of investments • High dividends despite debt • Focus on growth and profitability

  11. Customers + Suppliers • Customers • Late deliveries unacceptable • 80 days credit • Suppliers • Can you pay us within two weeks? • JIT delivery can you pay us upon receipt? • Do you intend to go JIT with all suppliers? • If yes how much notice will you give?

  12. Employees • Firing and Hiring does not provide security for my family. • Will this ever change? • Or I will look elsewhere! • I have experience and you hire three nephews…don’t they get family money through dividends? • What are their contributions?

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