Sengupta Fibres Ltd. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question No. 2: What does Ashoka’s financial forecast show in terms of financing needs? How big is the financing need? Would you as a banker finance they need? And if so, how would you want the loan to be secured?

Answer:

Currently, the Company is stuck in an unfortunate situation where cash outflows for supplies in no way match cash inflows from accounts receivable. The Company’s suppliers provide little or no credit opportunity. Therefore, the Company must pay suppliers at the time of delivery. However, the Company extends an average of 30 days of credit to the mills downstream. The 60 day wait period creates excessive interest expense and greatly reduces profitability. We think the Company should try to speed up its collections process. If the Company could reduce the standard credit terms from 60 days to 30 days, this would alleviate 30 days on which insurance must be paid. Note that with the current forecast, the amount of accounts receivable peaks at in June and July, 1990. The Adjusted Monthly Forecast of Balance Sheets in 1990 shows the efficient collection of accounts receivable reduces the year-end balance of the Note Payable to the bank to Rs.3, 135,569. Perhaps the Company could try to offer discounts on early payments in order to appease customers who are unhappy about the new mandatory 30-day credit standards.Gross sales were projected to reach Rs.78.2 million in the year that ended 31^st Dec, 1990.Senguptafibers had a peak season of two months in which the merchants start producing saris for the upcoming festivals.This was the reason behind the variations in the financial projections.Mrs. Sharma’s financial forecast does not show a satisfactory performance of the company. From the case, it is obvious that, although SenguptaFibers Ltd. at times is suffering from cash shortage, it is a profitable company that has been enjoying profit as well as sales growth in the past. But, the financial forecast has shown that the forecasted profit of Rs.980, 009 in the year of 1990 (which accounts to be only 1.5% of the forecasted gross sales) is far below than the profit of Rs.2, 624,742 in the year 1989 (which was accounted to be 4.7% of the gross sales for that year). Therefore, based on the Mrs. Sharma and Mr. Ashoka’s forecasts, even though the company continues to remain profitable, butwill decline in the year 1990.

Also, the monthly forecast of the income statement of the company shows that the company will experience a net profit in the business only in the 3 months, which is during the months of the seasonal peak in the demand for the nylon yarn. The inability of the company to maintain even a minimum level of profit in the rest 9 months might indicate a poor performance of the company.

The All India Bank should review these estimations carefully and then decide anything. Foe us, the management of the All India bank should not grant further loan to the Sengupta Fabrics Ltd. as their financial position was not comfortable.

Question No. 3: In exhibits 4 to 7, several suggestions are being made that all affect the liquidity position of the company. Discuss each of them separately and describe how they impact the financial position of the company.

Answer:

As shown in the appendices, the position of the company was never satisfactory as far as the liquidity and the financial health are concerned. In exhibit 3, the Debt to Equity have increased from around 11% to 30% (rounded up), that shows the excessive reliance over the debts have been increased. Similarly, the Debt Ratio was around 11% in the year 1989 and then it raced to 30% in the next year. In exhibit 4, the sales manager’s proposal seems to be feasible as it will earn more revenues and profit, the credit term changes will be dangerous. As the change for one customer in the same market should not be an option, it can affect negatively on the other customers. A relaxation in the credit policy means the cash would be tied up for a longer time and that will increase the opportunity cost of interest income that the company would have been earned by investing the same amount in the bank account. In exhibit 5, the proposal from the Transportation manager regarding the reduction in the inventory turnover from 60 to 30 days also seems beneficial, as it will save the cost of the possible inventory ware and tear, the holding and carrying cost of inventory and a decrease in the warehouse cost. In exhibit 6, Just in time inventory system will always be beneficial for any company subject to the proper and suitable supplier who experience in the JIT system...............................

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