Essay About Cash Collection And Increase Of Cogs

Kota Fibres
SYNDICATE 3: FRIDA HARYANI – 29115189RIDWANSYAH – 29115264RISA FITRIA M – 29115021CASE: KOTA FIBRESBACKGROUNDKota Fibres Ltd. (KFL) was established in 1962 at Kota. The firm supplied synthetic fibre yarns to local textile to make sari’s (Indian clothes).Current KFL performance:Profitable with indication of slowing growth of profitSales had grown at an annual rate of 18%The increase of COGS not covered by the increase in SalesThe textile industry in India is a growing industry with steady annual growth of 15% paPROBLEMLiquidity Problem:Unmatched between cash in and cash outHigh dependence to bank’s loans to cover the unmatched cash flowsMissed to make loan repayment to All-India Bank at the end of yearHigh cash dividend payment in a year Rs2,000,000Unable to pay excise taxThe requirement of minimum cash balance of Rs750,000Declining profitability Tight competitionThe increase of COGSIncrease in interest expenseANALYSISLiquidity & Profitability Qualitative AnalysisThere is wide gap between cash needed to deliver the product versus the cash received from the credit sales.Cash out in advance:Purchase of Raw Material was 2 months in advance of Sales (The company should bear the interest cost for about 4 months until the cash collection is received)The wage and operational cash expense was 1 month in advance of Sales (The company should bear the interest cost for about 3 months until the cash collection is received)The excise tax that should be paid in the month of delivery (The company should bear the interest cost for about 2 months until the cash collection is received) Cash in from collection:The Collection of Credit Sales was 40% in the next month and 60% in the next two months (although it’s said that the credit term 45 days, the actual collection is as stated in Exhibit 11)Thus, the gap between cash needed to deliver the product versus the cash received from the credit sales gave impact to:Increase the bank’s borrowings to cover the short term liquidity needsDecrease the profitability by increase the interest expense To reduce the gap, we can analyze the proposal from Transportation Manager, Purchasing Agent and considering change the Account Receivable Collection time.