Recommendation Guna Fibres must change a few of the policy that they have in place. Guna Fibres raw-material inventory should be changed from 60 days to 30 days, this will free up warehousing space. Guna should work on collecting the accounts receivable on or before 30 days. Guna should do this by giving a 3/30/net60. Guna should follow up faster to make the collections from customers. Having an incentive and being on top of the accounts receivable, the accounts receivable collection in the first 30 days should increase to 45%.
The jobs of calling customers should be given to the labor force, so that there is less hiring and firing, by not hiring and firing so much the company will be able to lower direct labor to 32%.Problem Statement Guna Fibres is suffering from a cash flow shortage from operations practices to pay for the daily costs. Guna Fibres uses short-term debt to pay these costs, but with the current operating practices has made it impossible to pay off the short-term debt.
This has made Guna Fibres unable to borrow short-term debt until it can show that it has the ability to pay down to zero for the 30-days period. Analysis of ProblemGuna Fibres’s Monthly Forecast Guna Fibres is a textile business situated in India, the industry experience seasonal changes in demand as well as a very competitive market. Guna Fibres has always used short-term debt to pay the daily operating cost to help with the changes in demand over the year. The seasonality of the industry and growth rate has formed several problems that have initiated the inability to pay down the short-term debt to zero, for the 30-day period.
Guna Fibres has always had to rely on the short-term debt to help with the seasonality of the industry. Historically, Guna Fibres has been able to zero out the short-term debt for the 30-day period, in 2011 Guna Fibres had experience supernormal growth and the increase in sales with the operating practices made it impossible to zero out a 30-day period in 2011. This now has led to the inability to borrow short-term debt in 2012. The analysis of Guna Fibres’s monthly forecast, using the current operating practices, has shown that the short-term debt will not be paid down to a zero balance for one month of the year (2012). The closest Guna Fibres will be able to paying down the debt to zero in one month’s time, while using the current operating practices, is in November of 2012 is INR 36.1 million. From the information that was given in Malik’s forecast it is clear that the debt will not be paid down for one month during the forecasted year of 2012. Guna Fibres has no official plan to show that the debt will be paid down, which has made Guna Fibres unable to borrowing short-term debt for 2012. Investigative the financial statements and the operating practices, of Guna Fibres, has revealed the likely causes of the company’s cash flow shortage. Guna Fibres has some clear reasons for the shortages, one of the reasons is because they have a problem with collect the majority of the accounts receivable within the first 30-days of it being outstanding. Another reason is due to the operating practices of having an inventory system of 60-days on hand. Additionally, another reason of the cash shortage is due to the seasonality and Guna Fibres having hire and fire the labor force. During the time of evaluating and forecasting Malik and Kumar were offered with two possible solutions, from the transportation manager and operations manager, to the cash flow shortages due to the operating practices and seasonality problems. After further inspection of Guna Fibres financial statements and operating practices, there were obvious indications that caused for concern. Guna Fibres collection of the accounts receivable had the majority of the accounts collected after 30-days being outstand, with only 40% of the receivables being collected in the first 30-days and the remaining 60% collect after the 30-days. Also, with difficulty in shipping the product, Guna Fibres has a policy of 60-days’ worth of inventory and has made the storage of the inventory in the warehouse take up a significant amount of real estate in the warehouse, plus the working capital is being tied up in the inventory for 60-days. With these two problems combined, Guna Fibres has had to rely heavily on the borrowing of short-term debt to pay for inventory. A proposed solution was from Sikh’s the transportation manager. Sikh proposed that the inventory policy should be changed from 60-days to 30-days. With this strategy Guna Fibres will be able to noticeably lower the amount of working capital that is spent on the inventory. This will also free up valuable warehousing real estate. The change in the inventory will be noticed in the first month, having a balance of zero in the purchases. Even though the zero balance will not be a reoccurring situation on the balance sheet, it will dramatically help free up the working capital that in tied up in the inventory.
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