Guna Fibres Case Analysis
Problem Statement
The problem that the firm Guna Fibres is facing is that they lack sufficient cash flow from operations to meet their day-to-day financial obligations. Guna Fibres has become dependent on a revolving line of credit from the All-India Bank & Trust Company and due to increasing operating expenses and costs of good sold Guna Fibres is no longer able to remain solvent based on their current financial practices.
Situation Analysis
Guna Fibres is a textile manufacturing company located in India that is subject to seasonal swings in demand as well as an increasingly competitive environment. Guna Fibres has historically utilized a line of credit from All-India Bank & Trust to finance the purchases necessary to fulfill the spike in demand that occurs each summer. Historically, Guna Fibres would zero out the balance on this line of credit in October, per the banks policy. At the end of 2011, Guna Fibres found themselves running a balance on their line of credit beyond October and was subsequently denied any more credit until the firm could demonstrate solvency to pay the balance off. To examine their company’s financial position Malik and Kumar created a financial forecast for the month-to-month operations of the company in an attempt to demonstrate to the bank that they firm could indeed pay off the loan. Analysis of the monthly forecast based on the assumptions of Guna Fibres current operating practices revealed that Guna Fibres would not be able to pay off the line of credit by the end of the year and in fact would owe a balance of 3,858,000 Rupees to the bank by December 2012. Based on the information contained in Malik’s forecast it is certain that the bank will not be willing to extend any more credit to Guna Fibres as currently there is no clear plan for the firm to pay its short term debit obligations. Examining Guna Fibres financial statements and business practices yields some insights into possible sources of the firm’s cash flow
The problem that the firm Guna Fibres is facing is that they lack sufficient cash flow from operations to meet their day-to-day financial obligations. Guna Fibres has become dependent on a revolving line of credit from the All-India Bank & Trust Company and due to increasing operating expenses and costs of good sold Guna Fibres is no longer able to remain solvent based on their current financial practices.
Situation Analysis
Guna Fibres is a textile manufacturing company located in India that is subject to seasonal swings in demand as well as an increasingly competitive environment. Guna Fibres has historically utilized a line of credit from All-India Bank & Trust to finance the purchases necessary to fulfill the spike in demand that occurs each summer. Historically, Guna Fibres would zero out the balance on this line of credit in October, per the banks policy. At the end of 2011, Guna Fibres found themselves running a balance on their line of credit beyond October and was subsequently denied any more credit until the firm could demonstrate solvency to pay the balance off. To examine their company’s financial position Malik and Kumar created a financial forecast for the month-to-month operations of the company in an attempt to demonstrate to the bank that they firm could indeed pay off the loan. Analysis of the monthly forecast based on the assumptions of Guna Fibres current operating practices revealed that Guna Fibres would not be able to pay off the line of credit by the end of the year and in fact would owe a balance of 3,858,000 Rupees to the bank by December 2012. Based on the information contained in Malik’s forecast it is certain that the bank will not be willing to extend any more credit to Guna Fibres as currently there is no clear plan for the firm to pay its short term debit obligations. Examining Guna Fibres financial statements and business practices yields some insights into possible sources of the firm’s cash flow