Financial Management 2
GUNA FIBRES Ltd
GROUP 7
MS23A008 Akash G
MS23A056 Pooja M
MS23A058 Pranav Parameshwaran
MS23A066 Ranjithkumar M P
MS23A086 Sriram S
About the case
Established in 1972 near New Delhi, Guna was a nylon fiber producer catering
to local textile weavers with synthetic yarns for saris.
Despite seasonal demand, the company faced financial strain due to low
profits, despite increasing sales.
To address this, restoring liquidity is vital. Workforce instability from seasonal
hiring and layoffs, along with high dividends to family shareholders, further
impacted profits negatively.
Facing financial challenges, Surabhi Kumar must decide on strategies to
improve Guna's financial health.
Proposals from the Transportation and Operations Managers recommend
adjusting the inventory policy and transitioning from seasonal to level
production to address these issues effectively.
1. What has led to cash crunch in Guna Fibres Ltd. ?
What are the issues confronting Surabhi Kumar ?
1) Lack of cash flow- Guna Fibres lacks sufficient cash flow from operations to meet their day-to-day financial
obligations. It has become dependent on a revolving line of credit from the All-India Bank & Trust.
2) Difference in Payables and Receivables days- Accounts Payable remained at approximately half of the month's
purchases. Accounts receivables collection is at the rate of 48 days.
3) Dividend Policy: Distribution of INR 5 million as dividend per quarter among its shareholders, resulting in lesser
investments.
4) Seasonal Production: The firm followed a plan of seasonal production, i.e. plant would operate at peak capacity
for two months in a year and at reduced capacities for the rest of the year. Hiring and layoffs also followed the
same patterns.
5) Raw Materials Inventory: Cost of RM runs about 55% of the gross sale price. Additionally, Guna purchases 2
months advance stock of raw materials, which leads to additional storage expenses.
6) Transportation Problem- The roads were narrow and in poor condition , hence the journey took more time time
and dangerous between Kolkata and Guna.
7) Increase in CoGS and Operating Expenses: Net profits decreased from ₹36 million (2010) to ₹25 million (2011),
even though their sales grew by 18%. Cost of goods sold (73.7%) and operating cost (6%) amount to almost 80% of
the gross sales due to increasing competition and addition of Quality Department respectively
2. What is the operating cash position of the company?
CURRENT CASH BUDGET
1. January to June (Negative Trend):
During the first half of the year, from
January to June, the company experienced
consistently negative net operating cash
flow.
The reasons for this could include high
operating expenses, low sales volumes, or
inefficient use of resources.
2. July to December (Positive Turnaround):
Starting from July, there's a significant
positive shift in the trend which is attributes
from financing from Loan taken before.
The company begins to generate positive
net operating cash flow, indicating that its
core operations are now producing more
cash than they are consuming.
3. Why is the banker refusing to extend credit to Guna
Fibres? Why will the loan officer refuse to accept the
forecast prepared by Malik as a basis for more credit?
Banker is refusing to extend credit to Guna Fibres because:
Guna Fibres was unable to pay off its prior debt
It had overdrawn its bank account three times in the space of a few weeks
October is the customary clean-up month under bank terms and Guna Fibres failed to make the full
repayment in October and the following month
Repayments are not possible until July 2012
The loan officer will refuse to accept the forecast prepared by Malik as a basis for more credit because:
▪ According to the forecast prepared by Malik, Guna Fibres will not be able to repay its debt in the month of
October or by the end of the year
4. Forecast the financial statements to reflect the two new proposals (i)
change in raw material inventory policy and (ii)Moving to level production.
Raw material inventory policy - Balance sheet & P/L
4. Forecast the financial statements to reflect the two new proposals (i)
change in raw material inventory policy and (ii)Moving to level production.
Raw material inventory policy - Cash Budget
By changing the raw
material policy, the WC loan
outstanding was reduced to
0.6 million in December.
While this is better than the
previous inventory policy, it
is still not complying with
the terms of the bank
manager.
4. Forecast the financial statements to reflect the two new proposals (i)
change in raw material inventory policy and (ii)Moving to level production.
Level Production - Balance sheet & P/L
4. Forecast the financial statements to reflect the two new proposals (i)
change in raw material inventory policy and (ii)Moving to level production.
Level Production - Cash Budget
Even in level production, the
WC loan was not paid off,
i.e., reduced to zero for at
least 30 days.
The lowest was in
September with 4.6 million.
5. What other possible scenario analysis can be done to
reduce bank debt?
Three different scenarios can be analysed:
Renegotiating payment policy with creditors/ suppliers
Increasing the current payment period from two weeks to four weeks will help Guna
fibers to reduces the need for making payments through line of credit.
Reducing the dividend paid quarterly
By reducing the quarterly dividend paid of 5 Mn, working capital requirements will
thereby sourced from equity shareholders and not from debt. (reduce interests)
Changing the minimum cash balance policy
The policy to maintain cash balance of 7.5 Mn is putting Guna Fibers in cash deficit
for its operations which can avoided by reducing minimum cash balance required.
6. What should Surabhi Kumar do now?
Surabhi Kumar should switch to level production and also follow the inventory
policy suggested by his Transportation Manager. She should also try to change
her dividend policy.
Change in Production and Inventory Policy: Seasonal hiring and layoffs
would be reduced, helping in optimizing operational cost. Similarly,
reducing the inventory capacity will reduce inventory holding costs. This
will help in improving the overall net profits of the company.
Change in Dividend Policy: Changing how dividends are distributed is set
to not just increase profits but also strengthen the company's working
capital, leading to improved financial stability.
THANK YOU
