Kota Fibres

Kota Fibres, Ltd.
Case Summary
Introduction Kota Fibres, Ltd. (the Company) is an India-based fiber manufacturing company that produces yarn for local textile companies to make saris. Due to timing of cultural festivals, the Company experiences seasonality in its business, with peak production from mid-May through mid-July. The seasonality of the business requires the Company to hire seasonal employees and pay overtime during peak months, and layoff employees during slow months. The average collection time for Accounts Receivable is 45 days, which means the Company has to borrow money from its bank through its busiest time, with a forecasted peak in its line of credit of 33 million INR in June 2001. The Company realizes and forecasts positive Net Income for the year, with Net Losses during the off-season from September through March annually. Despite the annual profits, the Company has negative cash flows because of its slow cash collections and quarterly dividend payments to shareholders. The bank has notified the Company that the line of credit will need to be paid in full by the end of 2001. Based on the current forecast, the Company will have an outstanding balance of 3.5 million INR at 12/31/01. The following is an analysis of how the Company can improve its operations, resulting in improved cash flow that will allow the line of credit to be paid in full by the end of 2001.
Analysis Cash Cycle Currently, the Company is stuck in an unfortunate situation where cash outflows for supplies in no way matches cash inflows from accounts receivable. The Companys suppliers provide little or no credit opportunity. Therefore, the Company must pay suppliers at the time of delivery. However, the Company extends an average of 45 days of credit to the mills downstream. The 45 day wait period creates excessive interest expense and greatly reduces profitability. We think the Company should try to speed up its collections process. If the Company could reduce the standard credit terms from 45 days to 30 days, this would alleviate 15 days on which insurance must be paid. The accounts receivable schedule has been revised to show a plan where the Company implements a mandatory 25% payment on the date of the sale and the remainder 75% payment within 30 days (see Exhibit C). Note that with the current forecast, the amount of accounts receivable peaks at $25.6 million in July, 2001. Under the revised schedule, the amount of accounts receivable peaks in June, 2001 at only $14.2 million. The Adjusted Monthly Forecast of Balance Sheets in 2001 shows the efficient collection of accounts receivable reduces the year-end balance on the Note Payable to the bank to $671,715. Perhaps the Company could try to discount the initial 25% payment in order to appease customers who are unhappy about the new mandatory 30-day credit standards. Operations Dividends Financing
Currently, the Company is paying a short-term interest rate of 14.5%. Because the Companys suppliers do not extend credit to the Company, yet the Company extends credit on its sales and accounts receivables, the Company is essentially acting as a financer for all activities downstream at a great expense. We think the Company should attempt to refinance its loan and reduce its interest rate to a more reasonable amount so that interest expenses do not continue to eat up profits. In Exhibit B, an interest rate of 7% is presumed. If All-India Bank & Trust Company is unwilling to refinance, the Company could seek refinancing through another bank. Conclusion Kota Fibres is a profitable yarn manufacturing company in India. Regardless, there are many improvements that could make the Company more profitable and improve cash flows. From an operational perspective, better matching cash payments to vendors and shareholders, with cash collections from its customers, would reduce borrowing needs and interest on outstanding bank debt. Changing to a just-in-time inventory system and spreading production throughout the year reduces cost of good sold through lower payroll expense and raw material costs. This also reduces the cost of storing excess inventory. Reducing dividend payments and matching the payments to shareholders to peak seasonal timelines would allow for more cash availability to pay down bank debt. From a financing perspective, the operational changes would allow the Company to reduce its outstanding line of credit balance during the summer months, which would in turn reduce interest expense and increase profitability. Refinancing the loan with the bank would extend the credit terms and allow the Company to spread payments over several years rather than
having to pay the entire balance in full. This would also allow the Company to take advantage of the current credit environment with lower interest rates. Finally, from a sales perspective, the Company should look into diversifying its customer base with customers that demand its yard product during off-peak times so the sales and profits could be spread more evenly throughout the year. All of the improvements identified would help the Company achieve its goals of improving cash flows, paying off the line of credit with the bank by 12/31/01, and increasing shareholder value.

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