기업분석#(Guna Fibres,Ltc.)

Statement Problem

 Guna Fibres has become difficult to operate a line of credit from the All-India Bank & Trust Company. Guna Fibres was refusing to extend any more seasonal credit because the company failed to make full repayment to be on time. Until the company proposed their reasonable financial plan to pay the loan by the end of 2012, they can`t extend their line of credit.      

Analysis of Problem

 

 Through changing production method from seasonal production to level production, Guna Fibres has some advantages about their financial statement. Level production is to sustain constantly the production cost. According to exhibit 4, the value of purchase should be altered to INR 5 million per month in level production in 2012. Through the result, Guna Fibres changed some factors positively. The value of inventory was decreased from INR117,572 to INR104,079. Inventory can be calculated by this method that is inventory (t-1) + purchase (t) + direct labor cost - COGS. Through using fixed the value of purchase, the value of purchase increased from INR50,824 to INR60,000 and direct labor costs also increased the cost from INR17,145 to INR19,241. Therefore, the value of inventory was decreased. To calculate inventory turnover, we need two things that is net sales and inventory per month. Net sales are INR77,264 and inventory per month is INR8,673. Net sale divided by inventory per month is 8.91. In compare to seasonal production the value of inventory turnover increase from 7.89 to 8.91. Through the value of inventory turnover were increased, Guna Fibres can gain storing and maintain space.

 

 Guna Fibres also decreased the value of total current liabilities from INR195,609 to INR180,813. To calculate total current liabilities, we need values accounts payable, note payable and accrued taxes. Because the value of purchase was fixed to INR 5000, the accounts payable value also was changed because the value of purchase should be needed in order to calculate the value of accounts payable. The method is 50%*Purchase (t). Also, the value of note payable and accrued taxes was each changed from INR170,766 to INR151,318 and INR-570 to INR-505. After all, the value of total current liabilities also was decreased from INR195,609 to INR180,813. The value of interest expense also was decreased from INR2,026 to INR1,676. Interest expense was affected by note payable so Interest expense was changed when values of note payable were changed. After all, the value of net profit increased from INR1,202 to INR1,447.

 

 There are also some disadvantages through changing method from seasonal production to level production in financial statement. According to exhibit 4, hiring and layoffs would no longer be necessary as changing seasonal method so layoff will decrease a ratio. However, the cost of direct labor and manufacturing costs increased from INR17,145 to INR19,241 instead of decreasing dismissal. Specifically, in order to calculate the costs labor and manufacturing, we need the value of purchase. The value of purchase was fixed 5 million when level production method was changed. The method is direct labor ratio* purchase (t). As the gross value of purchase increases, the direct labor and manufacturing costs also increase. Of course, the purchase ratio was decreased slightly from 34% to 32%. However, Gupta said in exhibit 4 that the expectation ratio is 29%. The expectation ratio at 29% showed the gap from 32%.

 

 Next, another solution is to change the inventory policy. According to exhibit 3, R. Sikh proposes that inventory requirement should be reduced from 60 days to 30 days. As a result, the value of purchase in January 2012 was 0. After the change value of purchase, there was much positive effectiveness in financial statement. First of all, the value of inventory decreased from INR117,572 to INR79,075. As R. Sikh said in exhibit 3, the inventory amounts reduced and space in warehouses rose. Inventory turnover also increased from 7.89 to 11.73. Increasing inventory turnover means that Guna Fibres can gain more storage space. Total current liabilities also decreased from INR195,609 to INR155,420 and net profit increased from INR1,202 to INR1,503. However, Guna Fibres has to make the value of note payable to INR0 in 2012 but reducing from 60 days to 30 days didn`t make the value of note payable to INR0 in 2012.

 

 To make the value of note payable to INR0, the company need to change some options like reducing dividends paid value, capital expense etc. I tried to change the value of capital expenditures using a scenario in Excel. The value of capital expenditures was INR350. I tried to decrease the value at from IRN350 to IRN338 using scenario in Excel. After the value of capital expenditures was changed, the value of note payable also was changed from INR36 to IRN0 in November 2012. The value of dividends paid also can be used with the scenario in Excel. When the value of dividends paid decreased from INR500 to INR488, the value of note payable was 0 in November 2012. These methods make note payable equal to 0 in November 2012. So I made note payables to INR0 using dividend paid in exhibit 5.   

 

Recommendation

 

 Guna Fibres, Ltd. should change the inventory policy through reducing inventory requirement from 60 days to 30 days because through the method, Guna Fibres can make the value of note payable to INR0. When Guna Fibres changed the value of purchase to INR0 in January 2012, Note payable in November 2012 was INR36. I tried to change the value of note payable to INR0 by reducing dividend paid. Dividend paid decreased from INR500 to INR488. Other factors like current liabilities inventory also was decreased in compare to seasonal production method. For this reason, Guna Fibres can clean up their payment to be on time and extend their line of credit.