Guna Fibres Case Analysis Essay.docx

Guna Fibres Case Analysis Essay Problem Statement The job that the house Guna Fibres is confronting is that they lack sufficient hard currency flow from operations to run into their daily fiscal duties. Guna Fibres has become dependent on a revolving line of recognition from the All-India Bank & A ; Trust Company and due to increasing operating disbursals and costs of good sold Guna Fibres is no longer able to stay solvent based on their current fiscal patterns. Situation Analysis Guna Fibres is a fabric fabricating company located in India that is capable to seasonal swings in demand every bit good as an progressively competitory environment. Guna Fibres has historically utilized a line of recognition from All-India Bank & A ; Trust to finance the purchases necessary to carry through the spike in demand that occurs each summer. Historically. Guna Fibres would zero out the balance on this line of recognition in October. per the Bankss policy. At the terminal of 2011. Guna Fibres found themselves running a balance on their line of recognition beyond October and was later denied any more recognition until the house could show solvency to pay the balance away. To analyze their company’s fiscal place Malik and Kumar created a fiscal prognosis for the month-to-month operations of the company in an effort to show to the bank that they firm could so pay off the loan. Analysis of the monthly prognosis based on the premises of Guna Fibres current operating patterns revealed that Guna Fibres would non be able to pay off the line of recognition by the terminal of the twelvemonth and in fact would owe a balance of 3. 858. 000 Rupees to the bank by December 2012. Based on the information contained in Malik’s prognosis it is certain that the bank will non be willing to widen any more recognition to Guna Fibres as presently there is no clear program for the house to pay its short term debit duties. Analyzing Guna Fibres fiscal statements and concern patterns yields some penetrations into possible beginnings of the firm’s hard currency flow jobs. First. by looking at Guna Fibres historical income statements one can clearly see several tendencies that are refering. While gross gross revenues have increased from 2010 to 2011. Guna Fibres has seen the firm’s cost of goods sold out gait gross gross revenues. Additionally. due to managerial determinations to increase quality control and spread out relationships with other houses. operating disbursals have increased every bit good. The terminal consequence for Guna Fibres is that despite their gross revenues growing the house experienced diminishing EBIT and diminishing new net income. At the clip of this analysis Kumar and Malik have besides been presented with several proposals that could perchance better the company’s current fiscal sufferings by turn toing policies that are presently making fiscal strain on the company. By taking closet expression at Guna Fibres forecast several other refering tendencies reveal themselves. Due to historically important slowdown times in transporting merchandise. Guna Fibres typically carries 60 yearss worth of stock list making a storage job in the company’s warehouse every bit good as a balance sheet job as a important part of the houses working capital is tied up in stock list. Intensifying the stock list issue is that typical aggregation times for histories receivable are over 48 yearss. with 40 % collected in a month and the staying 60 % collected in 60 yearss. This spread requires Guna Fibres to trust on the bank to pay for the stock list on manus. Guna Fibres has 2 hard currency direction policies that could be impacting their ability to pay back the bank loan. As a affair of policy Guna Fibres pays out a 500. 000 Rupee dividend to stockholders each one-fourth. the organization’s doctrine being that the hard currency is safer with stockholders than with the house. Additionally. Guna Fibres keeps 750. 000 Rupees as hard currency on manus. Looking at the fiscal prognosis for the beginning of 2012 1 can clearly see that Guna Fibres is expected to be running at a net loss for the first onefourth yet still pays a dividend and continues to keep the same hard currency balance. At the same clip Guna Fibres undertakings that it will be necessary to increase their funding demands from the bank. Addressing Guna Fibres current state of affairs is of great importance as they presently have a hard currency flow job that will happen them shuttered and unable to fund daily operations. In each of the aforesaid countries there is room for betterment by altering some of the company’s policies and processs. Major Strategic Options Using the monthly prognosis fiscal statement provided by Guna Fibres. Exhibit 1. it is necessary to make a statement of hard currency flows to get down to measure how the company’s capital is being managed through the on the job capital histories of the house. Exhibit 2 shows the dislocation of hard currency flows on a monthly footing based on the forecasted information provided by Guna Fibres. There are several of import penetrations to indicate to instability within Guna Fibres. The first tendency that is refering is that harmonizing to Guna Fibres prognosis. they will necessitate a positive hard currency flow from funding activities through the month

of June 2012 merely keep operations. Surely. if this was to be presented to the bank there would be no opportunity that they would be willing to widen recognition as Guna Fibres will non be able to zero out the debt balance in the approaching months. Examination of Exhibit 3 shows the statement of hard currency flows for Guna Fibres for twelvemonth stoping in December 2012. Note the highlighted the cell that indicates the alteration in short term notes collectible for the twelvemonth in the sum of 2. 704. 000 Rupees. Based on the current projections non merely will Guna Fibres non pay off the balance but besides they will accrue a larger balance by the terminal of the twelvemonth. Notice that while the entire hard currency flows from funding is merely 704K Rupees the ground for the lessening is that a dividend in the sum of 2. 000. 000 was paid to stockholders. In add-on to the concerns about Guna Fibres trust on the line of recognition is the famine of hard currency flow from operations. merely 330k Sri lanka rupees for 2012. Changes to Guna Fibres hard currency direction policy could assist to cut down the jobs that Guna Fibres is presently confronting. By analyzing Guna Fibres policy of paying stockholder dividends each one-fourth every bit good as their policy of maintaining 750K Sri lanka rupees on manus at all times one can get down to see where these policies place extra force per unit area on the house to borrow. Examine Exhibit 4. which is Guna Fibres Statement of Cash Flows if they had decided non to pay a dividend. Notice the highlighted cell bespeaking that alteration in notes collectible for twelvemonth stoping in December 2012 have decreased to 626. 000. Overall. net alteration in Cash Balance remains basically the same demonstrating that a big part of Guna Fibres financing demands in 2012 are to fund paying a stockholder dividend. As stated by the house. Guna Fibres believes that financess are more unafraid in the custodies of the company’s stockholders. However. this premise is likely based on the belief that dividends are paid out of net net income where the stockholders can gain a return elsewhere in the market topographic point. In this instance it is improbable that the stockholders will happen investings that return in surplus of the 14. 5 % debit service that is being paid to finance their dividends in add-on to the fact that the dividend payments are endangering to do Guna Fibres to close down. as they will no longer be able to finance operations. Guna Fibres could so pull hard currency from their hard currency histories to get down to pay down some of the balance that remains on their notes collectible. Similar to the issue with Guna Fibres dividend payments. even in months when Guna Fibres posts a net loss they maintain a hard currency balance of 750K. By using Guna Fibres hard currency histories to cover operating disbursals in months where Guna Fibres suffers a net loss this would cut down Guna Fibres trust on outside funding even more as can be seen in Exhibit 5. Please note the highlighted alteration in alteration in notes collectible down to 275K Sri lanka rupees as a consequence of covering net loss with hard currency as opposed to funding. Examination of Guna Fibres forecast every bit good as looking at some of the proposals sing alterations in operations elucidates another solution that would non necessitate Guna Fibres to do such drastic alterations to its dividend and hard currency balance policy. Harmonizing to R. Sikh. betterments have been made to Guna Fibres transporting operations so much so that it is no longer necessary to transport 2 months of stock list. The deduction for R. Sikh is that transporting 30 yearss less stock list will liberate up infinite in the warehouse ; nevertheless. due to Guna Fibres current fiscal state of affairs this alteration could hold a great impact on the house as a whole. Note the highlighted subdivisions on Exhibit 6. Exhibit 6 theoretical accounts the impact that traveling to a policy of merely keeping 30 yearss of stock list would hold on Guna Fibres financials. Note the yellow highlighted row. which indicates the new stock list degrees versus the degrees present in Guna Fibres original prognosis ( exhibit 1 ) . As a consequence of the lessening in carried stock list. the orange highlighted subdivision indicates a lessening in entire assets. as entire assets are in portion a merchandise of stock list degrees. Finally. the lessening in entire assets consequences in a greatly reduced trust on the line of recognition from the bank as less capital is tied up in stock list at any given clip. this consequence can be seen in the green highlighted row. Note 2 really of import effects: 1. That altering to Sikh’s transportation program for the month of January would let Guna Fibres to zero out the balance of their notes collectible for 30 yearss as required by the bank. and 2. That based on the prognosis Guna Fibres will be able to return to their expected rhythm of zeroing out the recognition line by the terminal of 2012. Due to alterations in the transportation policy Guna Fibres will necessitate to modify their ordination policy as demonstrated by the purple row. Here the purchases in period ( T ) are determined by the forecasted gross gross revenues in ( t+1 ) . Feasibility of Sikh’s program seems to be high as he indicates in his memo that new stock list processs could be put in consequence for January. Guna Fibres is besides sing a proposal from L. Gupta that was originated on way from Kumar to find the efficiency impact of exchanging to a degree production method. Harmonizing to Gupta. under degree production Guna Fibres will necessitate to buy a consistent INR5 million per month. Gupta suggests that this will supply several benefits to the house. it will ease labour unrest and employee dissatisfaction by making a stable work force. diminish the hazard associated with machine downtime during the peak-manufacturing season. and eventually Gupta indicates that degree fabrication will diminish fabrication costs by 5 % . While the benefits

described by Gupta are important. patterning the impact on Guna Fibres fiscal prognosis reveals some concerns. Note the highlighted subdivisions on Exhibit 7 with the xanthous bespeaking the new degree buying measure and the adjusted Direct Labor and other Manufacturing costs indicated with bluish. Concerns originate when looking at stock list in the months of July and August where both of these months will see Guna Fibres stocked out of merchandise during their peak-selling season. Additionally. it is of import to observe the purple row bespeaking the balance of Guna Fibres line of recognition. Not merely does it non zero out the balance in 2012 under the new fabrication system. but is besides ends the twelvemonth with a balance of more than 10 million Sri lanka rupees. Decision Standards In make up one’s minding which class of action Guna Fibres should take in response to their current crisis it is first of import to find the top precedences to keep operations. Secondary to that Guna Fibres should do a finding as to which alternate outputs the result that will be the most sustainable. As a consequence of the current crisis that Guna Fibres is confronting. the first precedence in finding a class of action is to implement the program that will fulfill the bank instantly. Due to Guna Fibres trust on their line of recognition this must be restored for operations to go on. Specifically. the program chosen must fulfill 2 conditions: 1. It must let Guna Fibres to zero out their balance with the bank every bit shortly as possible so that the bank will be willing to go on to widen recognition as Guna Fibres prepares for the following season. and 2. Guna Fibres must show that they will be able to systematically run into their duties to the bank in the hereafter. Internet Explorer. be able to zero out the balance in October 2012. Third concerns are related to the sustainability of the concern over the long term. as such looking at how alterations in policy could do Guna Fibres more susceptible/resilient to labour jobs. transportation holds. etc. Analysis of Options Analysis of strategic options one involves looking to see how eliminating dividends in 2012 every bit good as using Guna Fibre’s hard currency balances to cover net losingss each month would let the house to carry through the primary standards identified above. Mentioning to exhibit 8 note that the values have been adjusted as such that Guna Fibres is no longer paying a dividend and that hard currency is being used to cover net losingss. seting Guna Fibres policy of maintaining their hard currency balance at a INR 750K. Analyzing the yellow highlighted row one can see that these alterations improve both the monthly balanced carried on the line of recognition every bit good as better on the year-end balance. ( see highlighted subdivision exhibit 5 ) . Unfortunately. even the execution of both of these steps is improbable to fulfill the bank. First. the theoretical accounts do non demo that Guna Fibres will be able to zero out the balance on the history either in the short term or at any point following twelvemonth. While the theoretical account shows a relatively incremental addition in notes collectible at old ages end. it shows that Guna Fibres is still unable to run into their debt duties and the bank will be improbable to widen any farther recognition. Equally far as the secondary standards. this does non look to be a solution for the long term for Guna Fibres. While it slows some of the hemorrhage in the approaching twelvemonth. the fact remains that the house can non run into their fiscal duties and will probably happen themselves in a deeper hole following twelvemonth these are the lone alterations implemented. One benefit of the proposed alterations to hard currency direction would be that it could be accomplished without major process inspection and repair and could supply an immediate benefit to the house. Conversely. discontinuing dividends and passing the company’s hard currency balance would bespeak to stockholders and employees that the company in bad fiscal wellness and could make a morale job. Sikh’s proposal to capitalise on betterments in transporting times to better stock list trailing had some unintended effects that could be really good for Guna Fibres. By transporting merely 30 yearss worth of stock list at a clip Guna Fibres is able to dramatically cut down the sum of capital that is invested in their stock list. In bend this reduces entire assets and as a consequence lowers the necessary adoption from the bank. Implementing Sikh’s program instantly would fulfill both of the Bankss necessary conditions. As can be seen in Exhibit 6. the alteration in stock list policy would let the balance of notes collectible to be satisfied in the month of January and that Guna Fibres will be able to pay zero out the balance once more in the autumn as historically expected. Additionally. due to the betterments in transporting it is likely that this program can be implemented in a mode that is sustainable and non merely a “Band-Aid” solution to cover with symptoms of the underlying job. Finally. there are benefits and drawbacks of this program that need to be acknowledged. As it relates to the third standards mentioned above. The greatest benefit beyond the ability to go on operations is that making so will non compromise the company’s dividend payments or hard currency balances. This should hold a positive consequence on company

morale and continued stockholder and employee battle. One of the possible drawbacks is that the 30 twentyfour hours stock list policy will cut down some of the slack in the system and the incidence of a mechanical or natural stuffs hold could ensue in stock outs for Guna Fibres. Additionally. traveling to a merely in clip stock list system will necessitate Guna Fibres to hold really accurate projections for the following periods demand as the house will desire to avoid stock outs. While these concerns will necessitate to be taken into history. they are subordinated to the primary demand. which is to show a feasible fiscal theoretical account that will fulfill the bank. The concluding proposal to switch Guna Fibres to level production fails to fulfill the immediate demands of the bank every bit good as the long-run demands of being able to zero out the line of recognition. Exhibit 7 clearly shows that this policy will make an increased trust on the bank’s line of recognition to keep operations every bit good as create stock list stock outs during the busy season for Guna Fibres. This proposal may give some penetrations for the long term for Guna Fibres as Gupta is able to show lessenings in fabricating disbursal every bit good as benefits to morale and resilience to labour and fabrication jobs. However. at this clip. this program does non fulfill the immediate demand of Guna Fibres. Comparing the three proposed programs it is clear that following Sikh’s new stock list direction system is the ideal solution as it is the lone program that is likely to fulfill the bank. Additionally. Sikh’s program is sustainable and does non affect the house handling symptoms and really addresses the implicit in issue. Recommended Solution Based on the given analysis of the proposed solutions. Guna Fibres should implement the stock list direction program that was proposed by Sikh. Based on Sikh’s memo stock list processs can be implemented instantly and this class of action should be chosen. Even in the presence of minor holds or transitional jobs. the sustainable nature of this program should be adequate to carry the bank that Guna Fibres will be able to pay their debit duties traveling frontward. The biggest country of concern will be the importance of accurately projecting demand for the following period as holding 30 yearss less stock list will extinguish Guna Fibres ability to trust on excess stock when demand exceeds their projections. Attempts to turn to these concerns could include developing a more communicative relationship with the distributers that Guna Fibres sells to derive better information for doing their projections. An extra concern that needs to be addressed are how the alteration in stock list policy will impact Guna Fibres providers and if they will be able to suit the alterations to the houses telling policy. It is besides of import to maintain in head that if Guna Fibres implements this policy they still have the flexibleness to cut their dividend or cut down their hard currency balance to cover and periodic hard currency flow jobs. By showing that new stock list program to the bank with the extra eventuality of potentially cutting hard currency or the quarterly dividend. Guna Fibres should be able to restart operations and a relationship with the bank.