Essay About Month Of September And Following Month

Kota Fibres Case Study
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Cash Budget Kota Fibres produces nylon fiber at its only plant in Kota, India, and
is preparing its cash budget for the month of September 2003 through December 2003.
Expected sales from September 2003 to February 2004, as well as realized sales in July
and August 2003 are depicted in Table 2 (in thousands of rupees (Rs)). For delivery
and manufacturing reasons, Kotas purchases, which usually amount to 70% of sales,
have to be made two months in advance and the material has to be paid in cash,
i.e. Kotas actual supplier does not provide any credit at all. Collections of accounts
receivables, on the other hand, are as follows: The cash from 40% of sales is collected
after one month and the remaining 60% is collected after two months. Kota has a line
of credit with Bank of India but no other type of debt. The interest it pays each month
is computed as
1.25% Ч Line of Credit Balance at the End of the Previous Month.
Other cash expenses are as follows:
* Wages are 35% of the previous month purchases (there are no other salaries).
That is, the production cycle is as follows: Raw material is purchased in a given
month, processed by the employees in the following month and sold the month
after (this could be improved, of course).
* Rent is Rs10,000 per month.
* A dividend of Rs20,000 will be paid to Kotas shareholders (mainly family members)
at the end of September and at the end of December.
* A tax payment of Rs25,000 will be made in November.
* A fixed asset outlay of Rs150,000 is expected in October.
In order to keep its line of credit with Bank of India, Kota must clear it before the end
of December. Failure to do so would result in the termination of the line of credit, which
would severely
hamper Kotas activities. Kotas minimum cash balance is Rs25,000 and
its line of credit balance at the end of August is Rs45,000.
Month Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04
Sales 210 220 440 500 380 320 220 200
Table 2: Sales expectations for Kota Fibres (in Rs000)
(a) (10 points) Complete Kotas monthly cash budget from September 2003 to December
2003 using the above figures. Under the current assumptions, is Kota
repaying its line of credit by the end of December?
Answer: Kotas purchases in a given month are 70% of the sales expected two
months later, and all purchases are made cash. For example, cash purchases in
Septenmber are 70% of sales in November. Cash disbursement from September
to December are as in Table 3. Note that interest payments in a given month
depend on the line of credit at the end of the previous month and thus cash flows
in a given month must all be determined in order to compute the cash flows in
the following month. Cash receipts, on the other hand, are as in table 4, and the
cash budget is depicted in Table 5. Note that assuming a line of credit balance
of Rs45,000 at the end of August implies that ending cash in August, and thus
beginning cash in September, is −Rs20, 000. We can see on the cash budget table
that Kotas line of credit is not reimbursed at the end of december, so something
has to change in the way it runs its business.
(b) (20 points) Using sensitivity analysis, compare Kotas debt at the end of December
under (i) different credit arrangements with its current supplier, (ii) different
credit policies with its customers, (iii) a more efficient manufacturing and delivery
process (i.e. some of the raw material could be purchased one month before being
Month Sep-03 Oct-03 Nov-03 Dec-03
Cash purchases 266.0 224.0 154.0 140.0
Rent 10.0 10.0 10.0 10.0
Wages and salaries 122.5 93.1 78.4 53.9
Taxes 0.0 0.0 25.0 0.0
Fixed asset outlays 0.0 150.0 0.0 0.0
Interest payments 0.6 3.1 5.3 2.9
Dividends 20.0 0.0 0.0 20.0
Total disbursements 419.1 480.2 272.7 226.8
Table 3: Kotas cash disbursements in the base case (in Rs000)
Month Sep-03 Oct-03 Nov-03 Dec-03
Cash sales (0%) 0 0 0 0
Collections of A/R
Lagged one month (40%) 88 176 200 152
Lagged two months (60%) 126 132 264 300
Total cash receipts 214 308 464 452
Table 4: Kotas cash receipts in the base case (in Rs000)
sold (note that this would affect how wages are calculated)), (iv) different sales
levels.
Answer:
(i) Different Credit Arrangements with Suppliers Suppose Kota is able to find
suppliers