Guna Fibres Case Analysis Essay

conundrum StatementThe problem that the square Guna Fibres is facing is that they lack sufficient inter shift electric current from operations to meet their day-to-day pecuniary obligations. Guna Fibres has become babelike on a revolving farm animal of im stupefye from the All-India Bank & Trust guild and due to increasing operating(a) expenses and cost of good sold Guna Fibres is no bulkyer adapted to remain solvent ground on their authentic pecuniary practices.Situation AnalysisGuna Fibres is a textile manufacturing connection set(p) in India that is subject to seasonal swings in demand as sanitary as an increasingly competitive environment. Guna Fibres has historically utilized a plication of credit from All-India Bank & Trust to finance the acquires needful to replete the braid in demand that occurs each summer. Historically, Guna Fibres would zero bring give away the respite on this row of credit in October, per the imprecates polity. At the conclusio n of 2011, Guna Fibres found themselves cartroad a counterweight on their line of credit beyond October and was later on denied any more credit until the firm could demonstrate solvency to consecrate the equaliser off. To examine their companys fiscal position Malik and Kumar created a financial hope for the month-to-month operations of the company in an attempt to demonstrate to the shore that they firm could indeed pay off the loan.Analysis of the monthly view based on the assumptions of Guna Fibres catamenia operating practices revealed that Guna Fibres would not be cap equal to(p) to pay off the line of credit by the end of the twelvemonth and in fact would owe a brace of 3,858,000 Rupees to the entrust by December 2012. Based on the information contained in Maliks direct it is certain that the bank ordain not be entrusting to endure any more credit to Guna Fibres as shortly there is no fade intent for the firm to pay its short consideration debit entry obl igations.Examining Guna Fibres financial commands and business practices yieldssome insights into possible sources of the firms notes flow problems. First, by facial expression at Guna Fibres historical income statements nonpareil whoremaster clearly mark off several trends that are concerning. While gross gross revenue rush multifariousness magnitude from 2010 to 2011, Guna Fibres has seen the firms cost of goods sold issue pace gross sales. Additionally, due to managerial decisions to increase quality examine and expand relationships with opposite firms, operating expenses mystify increased as comfortably. The end result for Guna Fibres is that despite their sales g formth the firm experienced modification magnitude EBIT and decreasing new profit. At the time of this analysis Kumar and Malik gestate as well been presented with several proposals that could possibly ameliorate the companys sure financial woes by addressing policies that are currently creating finan cial strain on the company.By taking closet look at Guna Fibres bespeak several other concerning trends reveal themselves. referable to historically signifi do-nothingt lag generation in shipping product, Guna Fibres typically carries 60 old age worth of descent creating a storage problem in the companys storage warehouse as well as a eternal rest sheet problem as a signifi stackt portion of the firms working capital is tied up in inventory. Compounding the inventory issue is that typical collection times for accounts receivable are everyplace 48 long time, with 40% collected in a month and the remaining 60% collected in 60 days. This gap requires Guna Fibres to rely on the bank to pay for the inventory on hand.Guna Fibres has 2 coin management policies that could be impacting their ability to pay ass the bank loan. As a matter of insurance Guna Fibres pays out a 500,000 Rupee dividend to shareholders each bottom, the organizations philosophy world that the spry paym ent 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 sufferning of 2012 one can clearly see that Guna Fibres is judge to be running at a net loss for the first quarter yet still pays a dividend and traverses to allege the same cash equilibrium. At the same time Guna Fibres projects that it entrust be necessary to increase their gillyflowering needs from the bank.Addressing Guna Fibres current situation is of great importance as theycurrently have a cash flow problem that get out engender them shuttered and unable to fund day-to-day operations. In each of the said(prenominal) areas there is room for improvement by changing some of the companys policies and procedures.Major Strategic AlternativesUtilizing the monthly forecast financial statement provided by Guna Fibres, Exhibit 1, it is necessary to create a statement of cash flows to begin to assess how the companys capi tal is being managed with the working capital accounts of the firm. Exhibit 2 shows the breakdown of cash flows on a monthly basis based on the forecasted information provided by Guna Fibres. There are several important insights to point to instability at bottom Guna Fibres. The first trend that is concerning is that according to Guna Fibres forecast, they will require a despotic cash flow from financial support activities through the month of June 2012 only when prevent operations. Certainly, if this was to be presented to the bank there would be no chance that they would be willing to extend credit as Guna Fibres will not be able to zero out the debt balance in the coming months. psychometric test of Exhibit 3 shows the statement of cash flows for Guna Fibres for social class ending in December 2012. bank note the highlighted the cell that indicates the change in short term notes payable for the course of instruction in the amount of 2,704,000 Rupees. Based on the current projections not only will Guna Fibres not pay off the balance but also they will accrue a larger balance by the end of the stratum. Notice that while the append cash flows from financing is only 704K Rupees the reason for the drop is that a dividend in the amount of 2,000,000 was pay to shareholders. In addition to the concerns about Guna Fibres reliance on the line of credit is the dearth of cash flow from operations, only 330k Rupees for 2012.Changes to Guna Fibres cash management polity could help to reduce the problems that Guna Fibres is currently facing. By examining Guna Fibres policy of paying shareholder dividends each quarter as well as their policy of care 750K Rupees on hand at all times one can begin to see where these policies place additional pressure on the firm to borrow. Examine Exhibit4, which is Guna Fibres Statement of Cash 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, net change in Cash Balance remains essentially the same demonstrating that a large portion of Guna Fibres financing needs in 2012 are to fund paying a shareholder dividend.As stated by the firm, Guna Fibres believes that gold are more secure in the hands of the companys shareholders. However, this assumption is likely based on the belief that dividends are paid out of net profit where the shareholders can earn a generate elsewhere in the market place. In this case it is improbable that the shareholders will find investments that return in excess of the 14.5% debit service that is being paid to finance their dividends in addition to the fact that the dividend payments are intemperate to cause Guna Fibres to shut down, as they will no longer be able to finance operations.Guna Fibres could then d in the raw cash from their cash accounts to begin to pay down some of the balance that remains on their notes payable. homogeneous to the issue with Guna Fibres dividend payments, even in months when Guna Fibres posts a net loss they substantiate a cash balance of 750K. By utilizing Guna Fibres cash accounts to shell out operating expenses in months where Guna Fibres suffers a net loss this would reduce Guna Fibres reliance on outside funding even more as can be seen in Exhibit 5. Please note the highlighted change in change in notes payable down to 275K Rupees as a result of finishing net loss with cash as opposed to financing.Examination of Guna Fibres forecast as well as looking at some of the proposals regarding changes in operations elucidates another resultant role that would not require Guna Fibres to shit such(prenominal) drastic changes to its dividend and cash balance policy. According to R. Sikh, improvements have been made to Guna Fibres shipping operations so much so that it is no longer necessary to carry 2 months of inventory. The implication for R. Sikh is that carrying 30 days slight(prenomi nal) inventory will free up space in the warehouse however, due to Guna Fibres current financial situation this change could have a great impact on the firm as a whole. berth the highlighted sections on Exhibit 6. Exhibit 6 models the impact that moving to a policy of onlyholding 30 days of inventory would have on Guna Fibres financials. Note the yellow highlighted row, which indicates the new inventory takes versus the levels present in Guna Fibres original forecast (exhibit 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 decrease in total assets results in a greatly cut back 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 very important effects 1. That changing to Sikhs shipping political platform for the month of Janu ary would allow Guna Fibres to zero 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 zeroing out the credit line by the end of 2012. Due to changes in the shipping policy Guna Fibres will need to modify their enjoin policy as demonstrated by the purple row. Here the purchases in period (t) are determined by the forecasted gross sales in (t+1). Feasibility of Sikhs plan seems to be high as he indicates in his memo that new inventory procedures could be put in effect for January.Guna Fibres is also considering a proposal from L. Gupta that was originated on educational activity from Kumar to determine the efficiency impact of switching to a level proceeds method. According to Gupta, under level production Guna Fibres will need to purchase a consistent INR5 million per month. Gupta suggests that this will provide several benefits to the firm, it will ease labor unrest and employee dissatisfaction by creating a stable workforce, decrease the risk associated with machine downtime during the peak-manufacturing season, and finally Gupta indicates that level manufacturing will decrease manufacturing costs by 5%. While the benefits described by Gupta are significant, mold 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 measure and the adjusted Direct Labor and other Manufacturing costs indicated with blue. Concerns arise when looking at inventory in the months of July and August where both of these months will see Guna Fibres riped 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 course of action Guna Fibres should take in response to their current crisis it is first important to determine the top priorities to maintain operations. Secondary 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 antecedence in determining a course of action is to utilize the plan that will satisfy the bank straight. Due to Guna Fibres reliance on their line of credit this essential be restored for operations to continue.Specifically, the plan chosen must satisfy 2 conditions 1. It must allow Guna Fibres to zero out their balance with the bank as soon as possible so that the bank will be willing to continue to extend credit as Guna Fibres prepares for the bordering season, and 2. Guna Fibres must demonstrate that they will be able to systematically meet their obligations to the bank in t he future, ie. be able to zero out the balance in October 2012. Tertiary concerns are related to the sustainability of the business over the long term, as such looking at how changes in policy could make Guna Fibres more susceptible/resilient to labor problems, shipping delays, etceteraAnalysis of AlternativesAnalysis of strategic alternatives one involves 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 have 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 year-end balance, (see highlighted sec tion 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 incremental 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 solution for the long term for Guna Fibres. While it slows 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. One benefit of the proposed changes to cash management would be that it could be accomplished without major procedure overhaul and could provide an immediate benefit to the firm. C onversely, ceasing dividends and spending the companys cash balance would indicate to shareholders and employees that the company in bad financial health and could create a morale problem.Sikhs proposal to capitalize on improvements in shipping times to improve inventory tracking had some unmotivated 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 again in the fall as historically expected. Additionally, due to the improvements in ship ping it is likely that this plan can be implemented in a manner that is sustainable and not simply a Band-Aid solution to deal 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 tertiary 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 drawbacks is that the 30 day inventory policy will reduce some of the shirk in the system and the incidence of a mechanical or raw materials delay could result in stock outs for Guna Fibres. Additionally, moving to a just in time inventory system will require Guna Fibres to have very accurate projections for the next periods demand as the firm will want to avoid stock outs. While these concerns will need to be ta ken 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 insights 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 three proposed plans it is clear that adopting Sikhs new inventory management system is the high-flown solution as it is the only plan that i s likely to satisfy the bank. Additionally, Sikhs plan is sustainable and does not involve the firm treating symptoms and real addresses the underlying issue.Recommended SolutionBased 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 nestling delays or transitional problems, the sustainable nature of this plan should be fair to middling to persuade the bank that Guna Fibres will be able to pay their debit obligations going forward. The biggest area of concern will be theimportance of accurately projecting 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 additional concern that needs to be addressed 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 adventure of potentially cutting cash or the quarterly dividend, Guna Fibres should be able to resume operations and a relationship with the bank.