Question No. 1: What is the current situation? Why did the company run out of cash? What are the possible consequences for the company?
Answer:
The idea of Sengupta Fibres Ltd. Was initiated in the late 60s with the production of Nylon fiber at its only plant in Kota, India. Mrs. Sharma was the owner and the managing director of the company. The company was engaged in the business of making synthetic fiber which is used in weaving colorful clothes for making saris, the traditional dress of Indian women. The company produces Nylon Fiber by using advanced technology and locally made raw material. The company’s product was used by the Domestic Textile Weavers which used the company’s output as their inputs to manufacture cloths for making sari. Consumers purchases from Merchants, which may give credit for supporting the Sales. Textile Mills grants credits to the Merchants but yarn manufacturers have to supply the material on credit for capturing the market share, so, little or sometimes there is no credit given to the yarn manufacturers by their suppliers. In the early 1990, the company was hit by a severe liquidity crisis even though the company was operating profitably. The customers’ orders were not dispatched due to the non payment of Excise Duty and the government tax inspector asked the company to pay the taxes in cash in order to make deliveries to the customers but the bookkeeper discovered that the company had already overdrawn its bank account. On the other hand, the truck drivers rejected to wait for the settlement between the company and government and unloaded the truck. This has caused severe damaged to the company as the truck contractors claim for loss and loss of customers. After that incident, the company approached to the branch manager, of the All India bank and Trust Company, for granting loans to pay the excise tax and he asked Mrs. Sharma to present the financial conditions and company’s plans for the restructuring and restoring of the liquidity position of the company before him.
The main reason behind the cash problem was the in appropriate working capital arrangements that caused the company. In India, the peak season rests for 2 months for the demand of yarns and in the remaining year here was only a modest level demand for the company’s product. But still the company had to depend on more loans just as their heavy selling begins. To ensure prompt service, it established two distribution warehouses, but due to narrow roads which were in poor condition, trips were accident prone and very slow. Due to the short term cash crunch they were unable to pay short term debt, excise tax, maintain seasonal line of credit with bank and maintain timely delivery system. Sengupta fiber had a line of credit at All-India bank and trust company whose management have agreed the terms of compliance of maintaining 30-day cleanup of the loan but this time Sengupta Fibres Ltd. was unable to repay the required amount.
This situation acted as an alarm and forced All-India Bank & Trust Company to stop any kind of loan negotiations and demand reasonable financial plan for the company. Mrs. Sharma was shocked by the existing situation and she along with Mr. Ashoka, the bookkeeper went through financial condition and prepared a forecast of financial statements for 2001, using different assumption they had made. It was a very important issue because Sengupta required additional loan to fulfill short term obligations and for the time being they also needed to extend their line of credit. Sengupta Fibres Ltd. has applied to the All India Bank for a line of credits in order to pay the taxes on time and where it can also maintain its cash balances. Yet another problem was the repayment of the loan taken by the All India Bank.
On the other hand, despite the continued profitability, the company was taking loans form the All India Bank on a regular basis. In case the company would still be unable to repay the loan, the company would lose its credibility in the financial market and that will create further drastic problems in the near future in obtaining finance from the financial institutions.......................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Related Case Solutions & Analyses:
Dows Bid for Rohm and Haas
Note on International Trade Finance
Technical Note on Angel Investing in Emerging Markets
ACCION International
Housing Finance Agency
Donna Dubinsky and Apple Computer, Inc
Yellowhead Petroleum Limited
Ben & Jerry’s Homemade: The Unilever Scoop
Geo Tech
PureTech Ventures in 2011
