Guna Fibres Case

Guna Fibres Case

Yao Zhao

ID:701952725

1. Problems

After review the case we can find the main problem of the Guna Fibres. The main problem is that now company is lack of cash and they need more loan, but the bank refuse to give more loan unless company can give a reasonable financial plan to show they have ability to clean up the loan by the end of 2012. The company need to find a good way to clean up the loan and solve the problem of short of cash.

2. Steps for analysis. 

 To solve this problem, we need a series of procedure to analysis and solve it. First, it needs to know the current condition of Guna Fibres to make further analysis. Second, understand current forecast and find out what problem it has. Third, analysis first proposals of change in the inventory policy to see if it can solve the problem successful. Fourth, analysis second proposals of a scheme of level annual production to see if that work. Fifth, try to find out if there have other available ways to solve problem. Finally, choose the best way to solve problem.

3. Analysis.   

Step 1: For the first step, we can find Guna Fibres produce nylon fiber and it consistent growth and profitability from 2010 to 2011(Exhibit 1). For gross sales, in 2010 it is INR64 million and growth to INR76 million in 2011. It is a great result shows growth for about 18%. Although it net profit decrease from INR3.6 million to INR2.6 million, but we should find out it ROA still is 16.5%. It is really a good result for company and shows company’s profitability. The company growth of current assets with the growth of spontaneous current liabilities. For the leverage ratios we also can find out total debt/ total assets result for 2011 on is about 9.9%, it is a pretty healthy condition. So the company hopes it still can keep a good speed in increase and forecast it gross sales can reach IRN91 million in 2012(Exhibit 2). But now they face question in cash flow because they need more loans for operating but bank don’t want to give more loans unless company’s seasonal line of credit had to be reduced to a zero balance for at least 30 day each year. But based on current forecast, the company doesn’t have ability to clean up the loan by the end of 2012.

Step 2: Second, go through he forecast of Guna’s financial statements (Exhibit 3) and the graph of the projected monthly sales and key balance sheet accounts (Exhibit 4). It shows it stills has IRN3.9 million until Dec of 2012. It can’t satisfied bank’s need. So company need to find a good way to decrease the forecast of notes to bank and debt-to-assets to satisfied bank’s need. Company need to find some way to decrease more cost with the same time of decrease less profit.

Step 3: Next, analysis first proposals of change in the inventory policy to see if it can solve the problem successful (Exhibit 5). Before It raw-material inventory requirement time is 60 days, and the proposals suggest reduce it to 30 days. Because now the shipments are more reliability and they don’t need to keep that much inventory. By this way, it will need less inventory and it will need less loans and pay less interest each month. By this way also can free up a lot of space in the warehouse to do some things else. By this change the result we can find it make some different (Exhibit 6). It significant decrease inventory from Feb-12 to May-12. And it is also useful to decrease the note payable. Now the note payable in dec-12 decrease from IRN3.9 million to IRN3.0 million. But the problem is that make the situation to better but it still doesn’t solve the problem.