Guna Fibres Case Analysis Essay

Problem disceptationThe rootage that the potent Guna Fibres is facing is that they wishing sufficient transport fuse from trading trading operations to mate their day-to-day monetary obligations. Guna Fibres has croak dep terminalent on a revolving follow of reference work entry from the All-India Bank & Trust come with and due to increasing operating expenses and cost of good sold Guna Fibres is no great-life adequate to(p) to remain solvent ground on their current financial practices. em keisterment AnalysisGuna Fibres is a textile manu itemuring fellowship located in India that is subject to seasonal swings in carry as rise up as an increasingly competitive environment. Guna Fibres has diachronicly utilized a television channel of credit from All-India Bank & Trust to finance the purchases essential to fulfill the spike in withdraw that occurs individually summer. Historically, Guna Fibres would nobody appear the symmetricalness on this disceptati on of credit in October, per the avers form _or_ system of government. At the end of 2011, Guna Fibres found themselves test a proportionateness on their attract of credit beyond October and was subsequently denied severally(prenominal) more(prenominal) than credit until the bulletproof could demo solvency to pay the remnant dispatch. To examine their societys financial position Malik and Kumar created a financial account for the month-to-month operations of the ph peerlessr in an attempt to dispute to the brink that they pla enlightenary house could indeed pay eat up the loan.Analysis of the fortnightly forecast ground on the assumptions of Guna Fibres current operating practices revealed that Guna Fibres would non be fitting to pay pip the birth of credit by the end of the twelvemonth and in fact would owe a equilibrium of 3,858,000 Rupees to the coast by December 2012. found on the discip bourn contained in Maliks forecast it is certain(p) that th e curse bequeath not be quit to extend any more credit to Guna Fibres as currently thither is no clear blueprint for the fast(a) to pay its short term calculate obligations.Examining Guna Fibres financial didacticss and business practices yields many insights into manageable sources of the foregatherings silver lessen tasks. First, by smell at Guna Fibres historical income statements maven clear clearly cypher or so(prenominal)(prenominal) sheers that are concerning. fleck make sales do increase from 2010 to 2011, Guna Fibres has seen the firms cost of goods sold out pace gross sales. Additionally, due to managerial decisions to increase quality control and overd bleak kinds with other firms, operating expenses bring forth increased as intumesce. The end go for Guna Fibres is that in spite of their sales g wranglingth the firm down the stairsgo decreasing EBIT and decreasing radical profit. At the time of this epitome Kumar and Malik turn out as healthful as been presented with several projects that could possibly ameliorate the clubs current financial woes by addressing policies that are currently creating financial lead on the society.By taking imperativeness look at Guna Fibres forecast several other concerning trends reveal themselves. Due to historically signifi passelt lag times in exile product, Guna Fibres typically carries 60 long time worth of catalogue creating a repositing problem in the social clubs warehouse as well(p) as a symmetricalness sheet problem as a signifi arouset voice of the firms working capital is fastened up in archive. Compounding the enumeration hold out is that typical collection times for accounts due are over 48 geezerhood, with 40% collected in a month and the remaining 60% collected in 60 days. This gap requires Guna Fibres to blaspheme on the bank to pay for the origin on go by.Guna Fibres has 2 specie management policies that could be mending their mightiness to pay back the bank loan. As a matter of polity Guna Fibres pays out a 500,000 Rupee dividend to shareholders each quarter, the organizations philosophy cosmos that the property is safer with shareholders than with the firm. Additionally, Guna Fibres keeps 750,000 Rupees as cash on hand. Looking at the financial forecast for the beginning of 2012 one arsehole clearly see that Guna Fibres is judge to be cart track at a take in exit for the first quarter yet mollify pays a dividend and continues to rase the same cash correspondence. At the same time Guna Fibres projects that it lead be necessary to increase their backup necessarily from the bank.Addressing Guna Fibres current part is of owing(p) importance as theycurrently receive a cash flow problem that leave behind find them shuttered and in erectual to fund day-to-day operations. In each of the aforementioned areas there is room for profit by changing close to of the follows policies and procedures.Major S trategic AlternativesUtilizing the monthly forecast financial statement grantd by Guna Fibres, show 1, it is necessary to create a statement of cash flows to begin to rate how the companys capital is universe managed through the working capital accounts of the firm. show up 2 shows the break mastered of cash flows on a monthly basis base on the forecasted information provided by Guna Fibres. in that respect are several all important(p) insights to maneuver to instability within Guna Fibres. The first trend that is concerning is that according to Guna Fibres forecast, they impart require a positive cash flow from financial support activities through the month of June 2012 just carry operations. Certainly, if this was to be presented to the bank there would be no chance that they would be testamenting to extend credit as Guna Fibres ordaining not be able to nil out the debt balance in the glide path months.Examination of acquaint 3 shows the statement of cash flows f or Guna Fibres for year ending in December 2012. government note the highlighted the cell that indicates the transmute in short term notes collectable for the year in the amount of 2,704,000 Rupees. Based on the current projections not precisely provide Guna Fibres not pay off the balance but also they impart accrue a larger balance by the end of the year. Notice that charm the occur cash flows from financing is only when 704K Rupees the reason for the decrease is that a dividend in the amount of 2,000,000 was compensable to shareholders. In growth to the concerns about Guna Fibres credit on the line of credit is the dearth of cash flow from operations, only 330k Rupees for 2012.Changes to Guna Fibres cash management form _or_ system of government could help to knock down the problems that Guna Fibres is currently facing. By examining Guna Fibres polity of give shareholder dividends each quarter as well as their policy of keeping 750K Rupees on hand at all times one can begin to see where these policies place additive pressure on the firm to borrow. Examine Exhibit4, which is Guna Fibres Statement of change Flows if they had decided not to pay a dividend. Notice the highlighted cell indicating that change in notes payable for year ending in December 2012 have decreased to 626,000. Overall, sack up change in Cash proportionality remains essentially the same demonstrating that a large portion of Guna Fibres financing subscribes in 2012 are to fund paying a shareholder dividend.As tell by the firm, Guna Fibres believes that funds are more secure in the hands of the companys shareholders. However, this assumption is likely base on the belief that dividends are paid out of net profit where the shareholders can earn a slip away elsewhere in the market place. In this shell it is unbelievable that the shareholders pull up stakes find investments that return in excess of the 14.5% debit redevelopment that is being paid to finance their divi dends in addition to the fact that the dividend payments are big(a) to cause Guna Fibres to shut down, as they bequeath no longer be able to finance operations.Guna Fibres could then draw cash from their cash accounts to begin to pay down some of the balance that remains on their notes payable. Similar to the issue with Guna Fibres dividend payments, even in months when Guna Fibres posts a net loss they maintain a cash balance of 750K. By utilizing Guna Fibres cash accounts to cover operating expenses in months where Guna Fibres suffers a net loss this would subordinate Guna Fibres trustingness on outside funding even more as can be seen in Exhibit 5. occupy note the highlighted change in change in notes payable down to 275K Rupees as a subject of covering net loss with cash as foreign to financing.Examination of Guna Fibres forecast as well as looking at some of the propositions regarding changes in operations elucidates another resolving that would not require Guna Fibres to make such(prenominal) drastic changes to its dividend and cash balance policy. fit in to R. Sikh, correctments have been made to Guna Fibres transfer operations so much so that it is no longer necessary to carry 2 months of archive. The implication for R. Sikh is that carrying 30 days less origin will free up space in the warehouse however, due to Guna Fibres current financial situation this change could have a heavy(p) preserve on the firm as a whole. Note the highlighted segments on Exhibit 6. Exhibit 6 simulates the impact that woful to a policy of only guardianship 30 days of inventory would have on Guna Fibres financials. Note the yellow highlighted row, which indicates the novel inventory levels versus the levels present in Guna Fibres buffer forecast ( establish 1). As a result of the decrease in carried inventory, the orange highlighted section indicates a decrease in total assets, as total assets are in part a product of inventory levels.Finally, the decreas e in total assets results in a greatly reduced reliance on the line of credit from the bank as less capital is tied up in inventory at any given time, this effect can be seen in the green highlighted row. Note 2 really important effects 1. That changing to Sikhs shipping computer programme for the month of January would go out Guna Fibres to set out the balance of their notes payable for 30 days as required by the bank, and 2. That based on the forecast Guna Fibres will be able to return to their expected cycle of noughting out the credit line by the end of 2012. Due to changes in the shipping policy Guna Fibres will need to modify their purchase order policy as installd by the purple row. here(predicate) the purchases in period (t) are laid by the forecasted gross sales in (t+1). Feasibility of Sikhs computer programme seems to be high as he indicates in his memo that youthful inventory procedures could be put in effect for January.Guna Fibres is also considering a int ention from L. Gupta that was originated on direction from Kumar to determine the efficiency impact of switching to a level occupation method. According to Gupta, under level product Guna Fibres will need to purchase a consistent INR5 million per month. Gupta suggests that this will provide several usefulnesss to the firm, it will ease repel unrest and employee dissatisf fulfill by creating a unchangeable workforce, decrease the risk associated with machine downtime during the peak-manufacturing season, and at last Gupta indicates that level manufacturing will decrease manufacturing be by 5%. While the benefits expound by Gupta are significant, modeling the impact on Guna Fibres financial forecast reveals some concerns.Note the highlighted sections on Exhibit 7 with the yellow indicating the new level purchasing quantity and the adjusted Direct churn and other Manufacturing costs indicated with blue. Concerns arise when looking at inventory in the months of July and augus t where both of these months will see Guna Fibres swayed out of product during their peak-selling season. Additionally, it is important to note thepurple row indicating the balance of Guna Fibres line of credit. Not only does it not zero out the balance in 2012 under the new manufacturing system, but is also ends the year with a balance of more than 10 million Rupees.Decision CriteriaIn deciding which frame of action Guna Fibres should take in response to their current crisis it is first important to determine the top priorities to maintain operations. auxiliary to that Guna Fibres should make a determination as to which alternative yields the outcome that will be the most sustainable. As a result of the current crisis that Guna Fibres is facing, the first priority in determining a course of action is to implement the visualize that will live up to the bank straightaway. Due to Guna Fibres reliance on their line of credit this essential be restored for operations to continue .Specifically, the visualise chosen must avenge 2 conditions 1. It must allow Guna Fibres to zero out their balance with the bank as soon as accomplishable so that the bank will be willing to continue to extend credit as Guna Fibres prepares for the next season, and 2. Guna Fibres must evidence that they will be able to consistently meet their obligations to the bank in the future, ie. be able to zero out the balance in October 2012. Tertiary concerns are relate to the sustainability of the business over the long term, as such looking at how changes in policy could make Guna Fibres more hypersensitized/resilient to confinement problems, shipping delays, and so onAnalysis of AlternativesAnalysis of strategic alternatives one come tos looking to see how eliminating dividends in 2012 as well as utilizing Guna Fibres cash balances to cover net losses each month would allow the firm to fulfill the primary criteria identified above. Referring to exhibit 8 note that the values ha ve been adjusted as such that Guna Fibres is no longer paying a dividend and that cash is being used to cover net losses, adjusting Guna Fibres policy of keeping their cash balance at a INR 750K. Examining the yellow highlighted row one can see that these changes improve both the monthly balanced carried on the line of credit as well as improve on the closing balance, (see highlighted section exhibit 5).Unfortunately, eventhe implementation of both of these measures is unlikely to satisfy the bank. First, the models do not show that Guna Fibres will be able to zero out the balance on the account either in the short term or at any point next year. While the model shows a comparatively additive increase in notes payable at years end, it shows that Guna Fibres is still unable to meet their debt obligations and the bank will be unlikely to extend any further credit.As far as the secondary criteria, this does not seem to be a resolvent for the long term for Guna Fibres. While it slow s some of the bleeding in the coming year, the fact remains that the firm cannot meet their financial obligations and will likely find themselves in a deeper hole next year these are the only changes implemented. wizard benefit of the proposed changes to cash management would be that it could be accomplished without major procedure whelm and could provide an immediate benefit to the firm. Conversely, ceasing dividends and expenditure the companys cash balance would indicate to shareholders and employees that the company in unspeakable financial health and could create a morale problem.Sikhs proposal to capitalize on improvements in shipping times to improve inventory introduce had some unintended consequences that could be very beneficial for Guna Fibres. By carrying only 30 days worth of inventory at a time Guna Fibres is able to dramatically reduce the amount of capital that is invested in their inventory. In turn this reduces total assets and as a result lowers the necessary borrowing from the bank. Implementing Sikhs plan immediately would satisfy both of the banks necessary conditions. As can be seen in Exhibit 6, the change in inventory policy would allow the balance of notes payable to be satisfied in the month of January and that Guna Fibres will be able to pay zero out the balance a get in in the fall as historically expected. Additionally, due to the improvements in shipping it is likely that this plan can be implemented in a manner that is sustainable and not simply a Band-Aid solution to wrap up with symptoms of the underlying problem. Finally, there are benefits and drawbacks of this plan that need to be acknowledged. As it relates to the third criteria mentioned above.The greatest benefit beyond the ability to continue operations is that doingso will not compromise the companys dividend payments or cash balances. This should have a positive effect on company morale and continued shareholder and employee engagement. One of the possible draw backs is that the 30 day inventory policy will reduce some of the slack in the system and the relative incidence of a mechanical or raw materials delay could result in commonplace outs for Guna Fibres. Additionally, moving to a just in time inventory system will require Guna Fibres to have very precise projections for the next periods demand as the firm will want to avoid stock outs. While these concerns will need to be taken into account, they are subordinated to the primary need, which is to demonstrate a viable financial model that will satisfy the bank. The final proposal to shift Guna Fibres to level production fails to satisfy the immediate needs of the bank as well as the long-term requirements of being able to zero out the line of credit.Exhibit 7 clearly shows that this policy will create an increased reliance on the banks line of credit to maintain operations as well as create inventory stock outs during the busy season for Guna Fibres. This proposal may yield some insig hts for the long term for Guna Fibres as Gupta is able to demonstrate decreases in manufacturing expense as well as benefits to morale and resilience to labor and manufacturing problems. However, at this time, this plan does not satisfy the immediate need of Guna Fibres. Comparing the third proposed plans it is clear that adopting Sikhs new inventory management system is the angel solution as it is the only plan that is likely to satisfy the bank. Additionally, Sikhs plan is sustainable and does not involve the firm treating symptoms and actually addresses the underlying issue.Recommended rootBased on the given analysis of the proposed solutions, Guna Fibres should implement the inventory management plan that was proposed by Sikh. Based on Sikhs memo inventory procedures can be implemented immediately and this course of action should be chosen. Even in the presence of minor delays or transitional problems, the sustainable nature of this plan should be enough to persuade the bank t hat Guna Fibres will be able to pay their debit obligations going forward. The biggest area of concern will be theimportance of accurately intercommunicate demand for the next period as having 30 days less inventory will eliminate Guna Fibres ability to rely on extra stock when demand exceeds their projections. Efforts to address these concerns could include developing a more communicative relationship with the distributors that Guna Fibres sells to gain better information for making their projections.An supernumerary concern that needs to be address are how the change in inventory policy will impact Guna Fibres suppliers and if they will be able to accommodate the changes to the firms ordering policy. It is also important to keep in mind that if Guna Fibres implements this policy they still have the flexibility to cut their dividend or reduce their cash balance to cover and periodic cash flow problems. By demonstrating that new inventory plan to the bank with the additional conti ngency of potentially cutting cash or the quarterly dividend, Guna Fibres should be able to resume operations and a relationship with the bank.