Guna Fibres, Ltd.

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FIN 450

Eastern Michigan University

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Format for Individual Cases (2 Page MAX – Single Spaced)

Individual case analyses are equivalent to preparing an executive summary of the problem. The following format is REQUIRED:

I.Title Page
ll. Recommedation-Short Version (3 Sentences)

A solution must be recommended and supported by rational arguments.It is important to be able to articulate why a certain solution is recommended and to be able to defend it.There is usually not one correct solution to these case problems. But, there are incorrect solutions.For example, solutions that violate economic principles, or are inconsistent with financial theory, or are based on inconsistent assumptions, or violate ethical or legal standards are not acceptable solutions.Solutions not supported by data are not acceptable solutions.

III.Statement Problem – Do not repeat case – just state the problem to be solved.

This statement should briefly outline the problem presented in the case.Case details do not need to be repeated.The student should assume that the instructor has read the case.It is analogous to writing a report for a supervisor.

IV.Analysis of Problem

This statement should briefly outline the problem presented in the case.Case details do not need to be repeated.The student should assume that the instructor has read the case.It is analogous to writing a report for a supervisor. DO NOT OUTLINE PROCEDURES.

This section of the case analysis is where alternative solutions are explored.Pros and cons of different solutions should be presented.Application of theoretical models will be done in this section.Quantitative analysis should be done in exhibits and tables and referenced in this section.

Exhibits/Tables/Charts – Attached.Must be labeled and organized with the paper.For example, Exhibit 1 has to be the first exhibit discussed in the paper.You would never start with Exhibit 4 for example.

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Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases 750 40% 60% 55% 34% 350 50% Full year Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012 Jan-13 Feb-13 2,717 2,214 2,616 2,892 4,447 8,804 13,885 17,588 16,315 8,576 5,031 4,447 3,531 2,767 90,899 3,401 3,616 392 434 667 1,321 2,083 2,638 2,447 1,286 755 667 530 415 13,635 2,224 2,458 3,780 7,483 11,802 14,950 13,868 7,290 4,276 3,780 3,001 2,352 77,264 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 66,993 296 327 503 995 1,569 1,987 1,844 969 569 503 399 313 10,272 454 454 454 454 454 454 454 454 454 454 454 454 5,454 84 84 87 87 87 90 90 90 93 93 93 96 1,074 10 21 57 144 261 372 417 336 198 105 62 44 2,026 -253 -233 -96 309 767 1,071 882 88 -177 -150 -211 -281 1,717 -76 -70 -29 93 230 321 265 26 -53 -45 -63 -84 515 -177 -163 -67 217 537 750 617 62 -124 -105 -147 -197 1,202 500 500 500 500 Dec-11 Jan-12 Cash 762 750 Accounts Receivable (6) 2,673 2,773 Inventory 3,450 4,509 Total Current Assets 6,885 8,032 Gross Plant, Property, and Equip (7) 10,096 10,096 Accumulated Depreciation 1,484 1,568 Net Plant, Property, and Equipment 8,612 8,527 Total Assets 15,497 16,559 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 15% 73.7% 6.0% 10% 14.5% 30% 500 Feb-12 750 3,291 8,051 12,092 10,096 1,652 8,443 20,535 Mar-12 750 5,011 14,057 19,818 10,446 1,739 8,706 28,524 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 750 750 750 750 750 750 10,301 17,996 24,748 25,697 17,194 9,006 19,838 21,867 16,672 9,019 6,085 5,151 30,889 40,613 42,170 35,466 24,029 14,907 10,446 10,446 10,796 10,796 10,796 11,146 1,826 1,913 2,003 2,093 2,183 2,276 8,619 8,532 8,792 8,702 8,612 8,869 39,508 49,146 50,963 44,168 32,641 23,776 822 1,223 2,421 798 1,712 4,722 -90 -166 -236 1,530 2,769 6,908 13,967 13,790 13,627 15,497 16,559 20,535 3,818 11,910 -265 15,464 13,060 28,524 4,837 21,567 -172 26,232 13,277 39,508 4,487 30,787 58 35,332 13,813 49,146 2,358 34,541 0 36,899 14,063 50,963 1,384 27,840 265 29,488 14,680 44,168 Oct-12 Nov-12 Dec-12 750 750 750 6,295 5,028 3,715 4,056 3,841 4,427 11,100 9,619 8,891 11,146 11,146 11,496 2,369 2,462 2,558 8,777 8,684 8,938 19,877 18,303 17,829 1,223 971 761 935 994 16,385 8,687 5,147 3,610 3,858 291 0 -45 -108 -192 17,899 9,658 5,863 4,437 4,660 14,742 14,118 14,013 13,866 13,169 32,641 23,776 19,877 18,303 17,829 Inventory Detail Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012 Purchases (12) 1,439 1,591 2,446 4,842 7,637 9,673 8,973 4,717 2,767 2,446 1,942 1,522 1,871 1,989 50,824 Direct Labour & Other Mftg Costs (13) 489 541 832 1,646 2,596 3,289 3,051 1,604 941 832 660 517 636 17,145 Cost of Goods Sold 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 Inventory (14) 3,450 4,509 8,051 14,057 19,838 21,867 16,672 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 9,019 6,085 5,151 4,056 3,841 4,427 This spreadsheet supports STUDENT analysis of the case “Guna Fibres, Ltd.” (Case 12). This spreadsheet was prepared by Michael J. Schill, Associate Professor of Business Administration. Copyright © 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Feb. 4, 2013 Exhibit 1 GUNA FIBRES, LTD. Guna Fibres Annual Income Statements (in thousands of Indian rupees) Gross Sales Excise Tax Net Sales Cost of Goods Gross Profits Operating Expenses Depreciation Interest Expense Profit Before Tax Income Tax Net Profit 2010 64,487 9,673 54,814 44,496 10,318 3,497 769 910 5,142 1,545 3,597 2011 75,867 11,380 64,487 53,866 10,621 4,829 909 1,240 3,644 1,093 2,551 Cash Accounts Receivable Inventory Total Current Assets Gross Plant, Property, and Equipment Accumulated Depreciation Net Plant, Property, and Equipment Total Assets 895 2,390 2,974 6,259 8,868 1,170 7,698 13,957 762 2,673 3,450 6,885 10,096 1,484 8,612 15,497 Accounts Payable Notes to Bank Accrued Taxes Total Current Liabilities Owners' Equity Total Liabilities and Equity 603 0 -62 541 13,416 13,957 822 798 -90 1,530 13,967 15,497 Exhibit 2 GUNA FIBRES, LTD. Guna Fibres Monthly Sales, 2011 Actual and 2012 Forecast (in thousands of rupees) January February March April May June July August September October November December Year 2011 2012 (Actual) (Forecast) 2,012 2,616 2,314 2,892 3,421 4,447 7,043 8,804 12,074 13,885 15,294 17,588 14,187 16,315 7,144 8,576 4,025 5,031 3,421 4,447 2,717 3,531 2,214 2,767 75,867 90,899 Too optimistic, about 20% sales growth Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 2,717 2,214 2,616 2,892 4,447 8,804 13,885 17,588 16,315 8,576 5,031 392 434 667 1,321 2,083 2,638 2,447 1,286 755 2,224 2,458 3,780 7,483 11,802 14,950 13,868 7,290 4,276 1,577 1,744 2,682 5,309 8,373 10,606 9,838 5,171 3,034 646 714 1,098 2,175 3,430 4,344 4,030 2,118 1,243 454 454 454 454 454 454 454 454 454 84 84 87 87 87 90 90 90 93 10 17 43 114 206 289 335 241 94 98 159 514 1,519 2,682 3,511 3,150 1,333 601 29 48 154 456 805 1,053 945 400 180 69 111 359 1,063 1,877 2,458 2,205 933 421 500 500 500 Dec-11 Jan-12 Cash 762 750 Accounts Receivable (6) 2,673 2,773 Inventory 3,450 4,316 Total Current Assets 6,885 7,839 Gross Plant, Property, and Equip (7) 10,096 10,096 Accumulated Depreciation 1,484 1,568 Net Plant, Property, and Equipment 8,612 8,527 Total Assets 15,497 16,367 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 15% 60.3% 6.0% 10% 14.5% 30% 500 Feb-12 750 3,291 7,214 11,255 10,096 1,652 8,443 19,698 Mar-12 750 5,011 12,128 17,889 10,446 1,739 8,706 26,596 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 750 750 750 750 750 750 10,301 17,996 24,748 25,697 17,194 9,006 16,858 18,518 14,268 8,006 5,606 4,842 27,910 37,265 39,766 34,453 23,550 14,597 10,446 10,446 10,796 10,796 10,796 11,146 1,826 1,913 2,003 2,093 2,183 2,276 8,619 8,532 8,792 8,702 8,612 8,869 36,529 45,797 48,559 43,155 32,162 23,467 822 1,001 1,981 3,124 3,957 798 1,392 3,584 9,465 17,047 -90 -61 -13 0 456 1,530 2,331 5,552 12,589 21,460 13,967 14,036 14,147 14,006 15,069 15,497 16,367 19,698 26,596 36,529 3,671 23,919 1,260 28,850 16,947 45,797 1,930 27,725 0 29,654 18,904 48,559 Inventory Detail Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Purchases (12) 1,177 1,301 2,001 3,962 6,248 7,915 7,342 3,859 Direct Labour & Other Mftg Costs (13) 400 442 680 1,347 2,124 2,691 2,496 Cost of Goods Sold 1,577 1,744 2,682 5,309 8,373 10,606 750 40% 60% 45% changed from 55% 34% 350 50% Full year Oct-12 Nov-12 Dec-12 2012 Jan-13 Feb-13 4,447 3,531 2,767 90,899 3,401 3,616 667 530 415 13,635 3,780 3,001 2,352 77,264 2,682 2,129 1,669 54,812 1,098 872 683 22,452 454 454 454 5,454 93 93 96 1,074 9 -41 -65 1,252 542 365 198 14,672 163 110 60 4,402 380 256 139 10,271 500 Oct-12 Nov-12 Dec-12 750 750 750 6,295 5,028 3,715 3,945 3,770 4,249 10,990 9,548 8,714 11,146 11,146 11,496 2,369 2,462 2,558 8,777 8,684 8,938 19,767 18,232 17,652 1,132 1,001 794 623 19,969 7,775 709 -3,362 945 1,345 0 163 22,046 10,120 1,503 -2,576 21,110 22,042 21,963 22,343 43,155 32,162 23,467 19,767 765 -5,404 272 -4,367 22,599 18,232 814 -5,400 0 -4,586 22,238 17,652 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012 2,264 2,001 1,589 1,245 1,530 1,627 41,584 1,312 770 680 540 423 520 14,028 9,838 5,171 3,034 2,682 2,129 1,669 Inventory (14) 3,450 4,316 7,214 12,128 16,858 18,518 14,268 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 8,006 5,606 4,842 3,945 3,770 4,249 Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 2,717 2,214 2,616 2,892 4,447 8,804 13,885 17,588 16,315 8,576 5,031 392 434 667 1,321 2,083 2,638 2,447 1,286 755 2,224 2,458 3,780 7,483 11,802 14,950 13,868 7,290 4,276 1,856 2,052 3,155 6,246 9,851 12,479 11,575 6,085 3,569 368 406 625 1,237 1,951 2,471 2,292 1,205 707 454 454 454 454 454 454 454 454 454 84 84 87 87 87 90 90 90 93 10 20 55 139 251 356 401 317 176 -181 -152 29 557 1,159 1,571 1,347 344 -17 -54 -46 9 167 348 471 404 103 -5 -127 -106 20 390 811 1,099 943 241 -12 500 500 500 Dec-11 Jan-12 Cash 762 750 Accounts Receivable (6) 2,673 2,773 Inventory 3,450 4,501 Total Current Assets 6,885 8,024 Gross Plant, Property, and Equip (7) 10,096 10,096 Accumulated Depreciation 1,484 1,568 Net Plant, Property, and Equipment 8,612 8,527 Total Assets 15,497 16,552 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 15% 71.0% 6.0% 10% 14.5% 30% 500 Feb-12 750 3,291 8,001 12,041 10,096 1,652 8,443 20,485 Mar-12 750 5,011 13,887 19,648 10,446 1,739 8,706 28,354 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 750 750 750 750 750 750 10,301 17,996 24,748 25,697 17,194 9,006 19,528 21,455 16,296 8,855 6,019 5,101 30,579 40,202 41,794 35,302 23,963 14,856 10,446 10,446 10,796 10,796 10,796 11,146 1,826 1,913 2,003 2,093 2,183 2,276 8,619 8,532 8,792 8,702 8,612 8,869 39,199 48,734 50,586 44,004 32,575 23,726 822 1,223 2,421 798 1,633 4,519 -90 -144 -190 1,530 2,711 6,751 13,967 13,840 13,734 15,497 16,552 20,485 3,818 11,463 -181 15,100 13,254 28,354 4,837 20,732 -14 25,555 13,644 39,199 4,487 29,459 333 34,279 14,455 48,734 2,358 33,173 0 35,531 15,055 50,586 1,384 26,219 404 28,007 15,997 44,004 750 40% 60% 55% 29% changed from 34% 350 50% Full year Oct-12 Nov-12 Dec-12 2012 Jan-13 Feb-13 4,447 3,531 2,767 90,899 3,401 3,616 667 530 415 13,635 3,780 3,001 2,352 77,264 3,155 2,505 1,963 64,493 625 496 389 12,771 454 454 454 5,454 93 93 96 1,074 85 41 21 1,870 -7 -92 -183 4,374 -2 -28 -55 1,312 -5 -64 -128 3,062 500 Oct-12 Nov-12 Dec-12 750 750 750 6,295 5,028 3,715 4,030 3,837 4,405 11,075 9,615 8,870 11,146 11,146 11,496 2,369 2,462 2,558 8,777 8,684 8,938 19,852 18,299 17,808 1,223 971 761 935 994 14,607 7,028 3,372 1,737 1,869 507 0 -2 -30 -85 16,337 7,999 4,131 2,642 2,779 16,238 15,726 15,721 15,656 15,029 32,575 23,726 19,852 18,299 17,808 Inventory Detail Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012 Purchases (12) 1,439 1,591 2,446 4,842 7,637 9,673 8,973 4,717 2,767 2,446 1,942 1,522 1,871 1,989 50,824 Direct Labour & Other Mftg Costs (13) 417 461 709 1,404 2,215 2,805 2,602 1,368 802 709 563 441 542 14,624 Cost of Goods Sold 1,856 2,052 3,155 6,246 9,851 12,479 11,575 6,085 3,569 3,155 2,505 1,963 Inventory (14) 3,450 4,501 8,001 13,887 19,528 21,455 16,296 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 8,855 6,019 5,101 4,030 3,837 4,405 Exhibit 5 GUNA FIBRES, LTD. Monthly Financial Statement Forecast (in thousands of Indian rupees) Assumptions Excise Tax Rate Cost of Goods Sold / Gr Sales Annual Operating Expenses / Annual Gr Sales Depreciation / Gross PP&E Interest Rate on Borrowings (and Deposits) Income Tax Rate Dividends Paid (000s in March, June, Sep, Dec) Gross Sales (1) Excise Taxes (2) Net Sales Cost of Goods Sold Gross Profit Operating Expenses (3) Depreciation (4) Interest Expense (5) Profit Before Taxes Income Taxes Net Profit Dividend Minimum Cash Balance (000s) Accounts Receivable Collection In One Month In Two Months Purchases / Gr Sales in Two Months Direct Labour / Purchases Last Month Capital Expenditures (every third month) Accounts payable / Purchases 750 40% 60% 55% 34% 350 50% Full year Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012 Jan-13 Feb-13 2,717 2,214 2,616 2,892 4,447 8,804 13,885 17,588 16,315 8,576 5,031 4,447 3,531 2,767 90,899 3,401 3,616 392 434 667 1,321 2,083 2,638 2,447 1,286 755 667 530 415 13,635 2,224 2,458 3,780 7,483 11,802 14,950 13,868 7,290 4,276 3,780 3,001 2,352 77,264 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 66,993 296 327 503 995 1,569 1,987 1,844 969 569 503 399 313 10,272 454 454 454 454 454 454 454 454 454 454 454 454 5,454 84 84 87 87 87 90 90 90 93 93 93 96 1,074 10 21 57 144 261 372 417 336 198 105 62 44 2,026 -253 -233 -96 309 767 1,071 882 88 -177 -150 -211 -281 1,717 -76 -70 -29 93 230 321 265 26 -53 -45 -63 -84 515 -177 -163 -67 217 537 750 617 62 -124 -105 -147 -197 1,202 500 500 500 500 Dec-11 Jan-12 Cash 762 750 Accounts Receivable (6) 2,673 2,773 Inventory 3,450 4,509 Total Current Assets 6,885 8,032 Gross Plant, Property, and Equip (7) 10,096 10,096 Accumulated Depreciation 1,484 1,568 Net Plant, Property, and Equipment 8,612 8,527 Total Assets 15,497 16,559 Accounts Payable (8) Note Payable (9) Accrued Taxes (10) Total Current Liabilities Shareholders' Equity (11) Total Liabilities & Equity 15% 73.7% 6.0% 10% 14.5% 30% 500 Feb-12 750 3,291 8,051 12,092 10,096 1,652 8,443 20,535 Mar-12 750 5,011 14,057 19,818 10,446 1,739 8,706 28,524 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 750 750 750 750 750 750 10,301 17,996 24,748 25,697 17,194 9,006 19,838 21,867 16,672 9,019 6,085 5,151 30,889 40,613 42,170 35,466 24,029 14,907 10,446 10,446 10,796 10,796 10,796 11,146 1,826 1,913 2,003 2,093 2,183 2,276 8,619 8,532 8,792 8,702 8,612 8,869 39,508 49,146 50,963 44,168 32,641 23,776 822 1,223 2,421 798 1,712 4,722 -90 -166 -236 1,530 2,769 6,908 13,967 13,790 13,627 15,497 16,559 20,535 3,818 11,910 -265 15,464 13,060 28,524 4,837 21,567 -172 26,232 13,277 39,508 4,487 30,787 58 35,332 13,813 49,146 2,358 34,541 0 36,899 14,063 50,963 1,384 27,840 265 29,488 14,680 44,168 Oct-12 Nov-12 Dec-12 750 750 750 6,295 5,028 3,715 4,056 3,841 4,427 11,100 9,619 8,891 11,146 11,146 11,496 2,369 2,462 2,558 8,777 8,684 8,938 19,877 18,303 17,829 1,223 971 761 935 994 16,385 8,687 5,147 3,610 3,858 291 0 -45 -108 -192 17,899 9,658 5,863 4,437 4,660 14,742 14,118 14,013 13,866 13,169 32,641 23,776 19,877 18,303 17,829 Inventory Detail Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012 Purchases (12) 1,439 1,591 2,446 4,842 7,637 9,673 8,973 4,717 2,767 2,446 1,942 1,522 1,871 1,989 50,824 Direct Labour & Other Mftg Costs (13) 489 541 832 1,646 2,596 3,289 3,051 1,604 941 832 660 517 636 17,145 Cost of Goods Sold 1,928 2,131 3,277 6,489 10,233 12,962 12,024 6,321 3,708 3,277 2,602 2,039 Inventory (14) 3,450 4,509 8,051 14,057 19,838 21,867 16,672 Notes: (1) Follows forecast in Exhibit 2 (2) Gross Sales * Exercise Tax Rate (3) Annual Operating Expenses / 12 (4) Gross PPE * Depreciation Rate / 12 (5) Notes Payable (t - 1) * Interest Rate / 12 (6) AR(t - 1) + GSales(t) - 40% * GSales(t - 2) - 60% x GSales(t - 2) (7) GPPE(t -1) + Capex(t) (8) 50% * Purchases(t) (9) Total Assets - AP - AccTax - ShrEquity (10) AccTax(t - 1) + IncTax(t) or 0 if positive balance and month of quarterly payment (11) ShrEquity(t - 1) + NetProfit(t) - Dividend(t) (12) 55% * GSales(t + 2) (13) 35% * Purchases(t-1) (14) Inventory(t - 1) + Purchases(t) + Direct Labour(t) - COGS(t) 9,019 6,085 5,151 4,056 3,841 4,427 Exhibit 6 GUNA FIBRES, LTD. Forecast of Accounts by Month 40 35 Millions of Rupees 30 25 20 15 10 5 0 Jan-12 Feb-12 Net Sales Net Sales Accounts Receivable Inventory Accounts Payable Notes Payable Jan-12 2 3 5 1 2 Mar-12 Apr-12 May-12 Accounts Receivable Feb-12 Mar-12 2 4 3 5 8 14 2 4 5 12 Jun-12 Jul-12 Inventory Apr-12 May-12 7 12 10 18 20 22 5 4 22 31 Jun-12 15 25 17 2 35 Aug-12 Sep-12 Accounts Payable Jul-12 Aug-12 14 7 26 17 9 6 1 1 28 16 Sep-12 Oct-12 Accounts Payable Sep-12 4 9 5 1 9 Nov-12 Dec-12 Notes Payable Oct-12 Nov-12 Dec-12 4 3 2 6 5 4 4 4 4 1 1 1 5 4 4 CASE 9 Guna Fibres, Ltd. Surabhi Kumar, managing director and principal owner of Guna Fibres, Ltd. (Guna), discovered the problem when she arrived at the parking lot of the company's plant one morning in early January 2012. Customers for whom rolls of fiber yarn were intended had been badgering Kumar to fill their orders in a timely manner, yet trucks that had been loaded just the night before were being unloaded because the government tax inspector, stationed at the company's warehouse, would not clear the trucks for departure. The excise tax had not been paid; the inspector required a cash payment, but in seeking to draw funds that morning, Vikram Malik, the book- keeper, discovered that the company had overdrawn its bank account—the third time in as many weeks. The truck drivers, independent contractors,cursed loudly as they unloaded the trucks, refusing to wait while the company and government set- tled their accounts. This shipment would not leave for at least another two days, and angry customers would no doubt require an explanation. Before granting a loan with which to pay the excise tax, the branch manager of the All-India Bank & Trust Company had requested a meeting with Kumar for the next day to discuss Guna's financial condition and its plans for restoring the firm's liquidity. Kumar told Malik, “This cash problem is most vexing. I don't understand it. We're a very profitable enterprise, yet we seem to have to depend increasingly on the bank. Why do we need more loans just as our heavy selling season begins? We can't repeat this blunder.” Company Background Guna was founded in 1972 to produce nylon fiber at its only plant in Guna, India, about 500 km south of New Delhi. By using new technology and domestic raw mate- rials, the firm had developed a steady franchise among dozens of small, local textile weavers. It supplied synthetic fiber yarns used to weave colorful cloths for making This case was written by Thien T. Pham (MBA '90), Robert F. Bruner, and Michael J. Schill as a basis for class discussion. The names and institutions in this case are fictitious. The financial support of the Batten Institute is gratefully acknowledged. Copyright © 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of the Darden School Foundation. 133 134 Part Two Financial Analysis and Forecasting saris, the traditional women's dress of India. On average, each sari required eigen female population at around 600 million, the demand for saris accounted for more yards of cloth. An Indian woman typically would buy three saris a year. With India's than 14 billion yards of fabric. This demand was currently being supplied entirely from domestic textile mills that, in turn, filled their yarn requirements from suppliers Case 9 Guna Fibres, Ltd. 135 Company Performance Guna had experienced consistent growth and profitability (see Exhibit 9.1 for firm's recent financial statements). In 2011, sales had grown at an impressive rate of 18%. Recent profits were INR25 million, down from INR36 million in 2010.' Kumar ex- pected Guna's growth to continue with gross sales reaching more than INR900 million in 2012 (Exhibit 9.2).? Synthetic Textile Market able seasonal fluctuations. Unit demand increased with both population and na- The demand for synthetic textiles was stable, with year-to-year growth and predict- tional income. In addition, India's population celebrated hundreds of festivals each most important festival, the Diwali celebration in midautumn, caused a seasonal year, in deference to a host of deities, at which saris were traditionally worn. The peak in the demand for new saris, which in turn caused a seasonal peak in demand for nylon textiles in late summer and early fall. Thus the seasonal demand for nylon yarn would peak in midsummer. Unit growth in the industry was expected to be Consumers purchased saris and textiles from cloth merchants located in villages 15% per year. throughout the country. A cloth merchant usually was an important local figure who was well known to area residents and who generally granted credit to support consumer purchases. Merchants maintained relatively low levels of inventory and built stocks of goods only shortly before and during the peak selling season. Competition was keen among those merchants' suppliers (the many small textile- weaving mills) and was affected by price, service, and the credit they could grant to the merchants. The mills essentially produced to order, building their inventories of woven cloth shortly in advance of the peak selling season and keeping only maintenance stocks at other times of the year. The yarn manufacturers competed for the business of the mills through responsive service and credit. The suppliers to the yarn manufacturers provided little or no trade credit. Being near the origin of the textile chain in India, the yarn manufacturers essen- tially banked the downstream activities of the industry. Reassessment After the episode in the parking lot, Kumar and her bookkeeper went to her office to analyze the situation. She pushed aside two items on her desk to which she had intended to devote her morning: a message from the transportation manager regarding a possible change in the inventory policy (Exhibit 9.3) and a proposal from the operations man- ager for a scheme of level annual production (Exhibit 9.4). To prepare a forecast on a business-as-usual basis, Kumar and Malik agreed on vari- ous parameters. Cost of goods sold would run at 73.7% of gross sales—a figure that was up from recent years because of increasing price competition. Annual operating ex- penses would be about 6% of gross annual sales. Operating expenses were up from recent years to include the addition of a quality-control department, two new sales agents, and four young nephews in whom Kumar hoped to build allegiance to the family business. Kumar had long felt pressure to hire family members to company management. The four new fellows would join 10 other family members on her team. Although the company's income tax rate of 30% accrued monthly, positive balances were paid quarterly in March, June, September, and December. The excise tax (at 15% of sales) was different from the income tax and was collected at the factory gate as trucks left to make deliveries to customers and the regional warehouses. Kumar expected to pay dividends of INR5.0 million per quarter to the 11 members of her extended family who owned the entirety of the firm's equity. For years, Guna had paid substantial dividends. The Kumar family believed that excess funds left in the firm were at greater risk than if the funds were returned to shareholders. Accounts receivable collections in any given month had been running steadily at the rate of 48 days, comprised of 40% of the previous month's gross sales plus 60% of the gross sales from the month before that. The cost of the raw materials for Guna's yarn production ran about 55% of the gross sale price. To ensure sufficient raw material on hand, it was Guna's practice each month to purchase the amount of raw materials ex- pected to be sold in two months. The suppliers Guna used had little ability to provide credit such that accounts payable were generally paid within two weeks. Monthly direct labor and other direct costs associated with yarn manufacturing were equivalent to about 34% of purchases in the previous month." Accounts payable ran at about half of the month's purchases. As a matter of policy, Kumar wanted to see a cash balance of at Dividendo AIR Production and Distribution System Thin profit margins had prompted Kumar to adopt policies against overproduction and overstocking, which required Guna to carry inventories through the slack selling sea- son. She had adopted a plan of seasonal production, which meant that the yarn plant would operate at peak capacity for two months of the year and at modest levels the rest of the year. That policy imposed an annual ritual of hirings and layoffs. To help ensure prompt service, Guna maintained two distribution warehouses, but getting the finished yarn quickly from the factory in Guna to the customers was a chal- lenge. The roads were narrow and mostly in poor repair. A truck was often delayed negotiating the trip between Kolkata and Guna, a distance of about 730 km. Journeys were slow and dangerous, and accidents were frequent. Challenge INR - Indian rupees. -At the time, the rupee exchange rate for U.S. dollars was roughly at the rate of INR50 per The 73.7% COGS rate assumption was determined based on these purchases and direct cost figures: 73.7% = 55% + 55% X 34%. dollar. 25 Part Two Financial Analysis and Forecasting 26 cash Case 9 Guna Fibres, Ltd. EXHIBIT 9.1 1 Guna's Annual Income Statements (in millions of Indian rupees) 137 least INR7.5 million. To sustain company expansion, capital expenditures were antici- pated to run at INR3.5 million per quarter. Guna had a line of credit at the All-India Bank & Trust Company, where it also maintained its cash balances. All-India's short-term interest rate was currently 14.5%, but Kumar was worried that inflation and interest rates might rise in the coming year. By terms of the bank, the seasonal line of credit had to be reduced to a zero balance for at least 30 days each year. The usual cleanup month had been October, but last year Guna had failed to make a full repayment at that time. Only after strong assurances by Kumar that she would clean up the loan in November or December had the lending officer re- luctantly agreed to waive the cleanup requirement in October. Unfortunately, the credit needs of Guna did not abate as rapidly as expected in November and December, and although his protests increased each month, the lending officer had agreed to meet credit until Kumar presented a reasonable financial plan for the company that demon- strated its ability to clean up the loan by the end of 2012. Guna's cash requirements with loans. Now he was refusing to extend any more seasonal 2010 2011 Gross Sales 644.8 758.7 Excise Tax 96.7 113.8 Net Sales 548.1 644.9 Cost of Goods 445.0 538.6 Gross Profits 103.1 106.3 Operating Expenses 35.0 48.3 Depreciation 7.7 9.1 Interest Expense 9.1 12.4 Profit Before Tax 51.4 36.5 Income Tax 15.5 10.9 Net Profit 35.9 25.6 Cash 9.0 7.6 Accounts Receivable 23.9 26.7 Inventory 29.7 34.5 Total Current Assets 62.6 68.8 Gross Plant, Property, and Equipment (PPE) 88.7 100.9 Accumulated Depreciation 11.7 14.8 Net PPE 77.0 86.1 Total Assets 139.6 154.9 Financial Forecast With some experience in financial modeling, Malik used the agreed-upon assumptions to build out a monthly forecast of Guna’s financial statements (Exhibit 9.5). To sum- marize the seasonal pattern of the model, Malik handed Kumar a graph showing the projected monthly sales and key balance sheet accounts (Exhibit 9.6). After studying the forecasts for a few moments, Kumar expostulated: The loan officer will never accept this forecast as a basis for more credit. We need a new plan, and fast. Maintaining this loan is critical for us to scale up for the most important part of our business season. Please go over these assumptions in detail and look for any opportunities to improve our debt position. 6.0 Accounts Payable Notes to Bank Accrued Taxes Total Current Liabilities Owners' Equity Total Liabilities and Equity 0.0 8.2 8.0 -0.6 Then looking toward the two proposals she had pushed aside earlier, she muttered, “Perhaps these proposals will help.” 5.4 134.2. 139.6 -0.9 15.3 139.6 154.9 Source: All exhibits created by case writer. 25 et Food 23 de PS I DUE Renew Coc Probus Bota tiverad Financial Analysis and Forecasting DB3 washing 26 saturday EXHIBIT 9.2 I Guna's Monthly Sales, 2011 Actual and 2012 Forecast (in millions of Indian rupees) Case 9 Guna Fibres, Ltd. 139 EXHIBIT 9.4 | Message from Operations Manager 2011 (Actual) 2012 (Forecast) January 7, 2012 20.1 26.2 23.1 28.9 To: From: S. Kumar L. Gupta 34.2 January February March April May June 44.5 88.0 70.4 120.7 138.9 175.9 152.9 141.9 163.2 85.8 71.4 You asked me to estimate the production efficiencies arising from a scheme of level annual production where our production rate is level over the year rather than highly seasonal as it currently is. To provide for the estimated production needs in 2012 and 2013 with level production, I recommend that purchases shift to INR50 million per month. There are significant operating advantages to be gained withthis operating scenario: Seasonal hirings and layoffs would no longer be necessary, permitting us to cultivate a stronger work force and, perhaps, to suppress labor unrest. You will recall that the unions have indicated that reducing seasonal layoffs will be one of their major negotiating objectives this year. Level production entails lower manufacturing risk. With the load spread throughout the year, we would suffer less from equipment breakdowns and could better match the routine maintenance with the demand on the plant and equipment. . 40.2 July August September October November December Year 50.3 34.2 44.5 27.2 35.3 22.1 27.7 758.7 909.0 With level production my team believes that direct labor and other direct manufacturing costs could be reduced from a forecasted 34% of purchases down to 29% of purchases. EXHIBIT 9.3 | Message from Transportation Manager January 2, 2012 To: S. Kumar From: R. Sikh As you asked me to, I have been tracking our supply shipments over the past year. I have observed a substantial improvement in the reliability of the shipments. As a result, I would propose that we reduce our raw-material inventory requirement from 60 days to 30 days. This would reduce the amount of inventory we are carrying by one month, and should free up a lot of space in the warehouse. I am not sure if that will affect any other department since we will be buying the same amount of material, but it would make inventory tracking a lot easier for me. Please let me know so we can implement this in January such that I don't purchase any additional raw material this month.
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Running head: GUNA case example

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GUNA case example
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GUNA case example

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Recommendation

Guna fibres should consider reviewing its financial plan. After analyzing the case study,
there are various alternatives that could be implemented. In maintaining the inventory, the
inventory period should be reduced from the current 60 days to a minimum of 30 days. Dividend
policy should be restructured to a payment of 50% on a monthly basis after profit has been
generated. The debt collection period should also be reduced from 48 to at least 36 days.
Problem statement
The company has been facing challenges in terms of operating cashflow. It has a policy
whereby there is a lack of accountability on how the money is spent. Considering the recent
instance, it can be clearly seen that the financial department has been operating under losses if
the business does not have any cash to pay for the expenses like the excise tax which should be a
compulsory obligation. If the business continues with the same policy, it will eventually collapse
due to liquidity problems. Considering the case study, the company has been providing
customers with credit for most of the supplies in a move to strive through the competitive
market. However, the debt collection period is too long such that in the end, the company does
not have any money to finance its normal operations which is a big blow to the business.
Analysis of the problem
Gun...


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