Case Analysis of Kota Fibers, Ltd Essay

3444 Words Oct 20th, 2012 14 Pages
Case Analysis of Kota Fibers, Ltd

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Executive summary

Kota Fibers, Ltd engages in yarn production in Kota Town, India. Textile millers use the yarn to make traditional dresses (saris) for women in India. Kota Fibers has been in operation since 1962 and has over the years faced an annual growth rate of 15 percent. This due to the rapid growth of the female population in India. In January 2001, the Managing director of the company Ms. Pundir realized that the company has been surprisingly hit by a cash shortage.

The company’s liquidity problems had a number of negative implications on its operations. Delivery of customer orders had to be postponed as it had to pay excise duty on a cash basis, before the loaded
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The resultant cash shortage has precipitated the company’s problems such as the ability to pay excise tax. As detailed from the case study, a 15% excise tax on sales has to be paid in cash before any of the distributors’ trucks leave the company.

The other key problem pertains to the repayment of loans advanced to the company. The All- India bank maintains the company’s cash balances, as well as grants it a line of credit. A line of credit in this context refers to an arrangement between a firm and a financial institution in which the bank sets a maximum loan balance which the firm can draw on provided it does not surpass the maximum limit. A line of credit differs from a conventional loan in that the undrawn amount does not attract any interest, is unsecured and the borrower can draw the remaining amount at any time. However, problems were emerging at the company given that it had overdrawn from its bank account for three times in a row. The problems in repayment had promoted the lending official to decline to a request to overdraw and, Ms. Pundir had to intervene by assuring him that payments would be cleared in two months time.

As a result of the firm’s liquidity problems, delays in supply of yarns were being experienced. The implications were a deteriorating relationship with the distributors given that the firm hired them as independent contractors. Furthermore, the firm inconvenienced it customers. This had potentially

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