Kota Fibres Cash Budget

Cash Budget Kota Fibres produces nylon fiber at its only plant in Kota, India, and

is preparing its cash budget for the month of September 2003 through December 2003.

Expected sales from September 2003 to February 2004, as well as realized sales in July

and August 2003 are depicted in Table 2 (in thousands of rupees (Rs)). For delivery

and manufacturing reasons, Kota’s purchases, which usually amount to 70% of sales,

have to be made two months in advance and the material has to be paid in cash,

i.e. Kota’s actual supplier does not provide any credit at all. Collections of accounts

receivables, on the other hand, are as follows: The cash from 40% of sales is collected

after one month and the remaining 60% is collected after two months. Kota has a line

of credit with Bank of India but no other type of debt. The interest it pays each month

is computed as

1.25% Ч Line of Credit Balance at the End of the Previous Month.

Other cash expenses are as follows:

• Wages are 35% of the previous month purchases (there are no other salaries).

That is, the production cycle is as follows: Raw material is purchased in a given

month, processed by the employees in the following month and sold the month

after (this could be improved, of course).

• Rent is Rs10,000 per month.

• A dividend of Rs20,000 will be paid to Kota’s shareholders (mainly family members)

at the end of September and at the end of December.

• A tax payment of Rs25,000 will be made in November.

• A fixed asset outlay of Rs150,000 is expected in October.

5

In order to keep its line of credit with Bank of India, Kota must clear it before the end

of December. Failure to do so would result in the termination of the line of credit, which

would severely

hamper Kota’s activities. Kota’s minimum cash balance is Rs25,000 and

its line of credit balance at the end of August is Rs45,000.

Month Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04

Sales 210 220 440 500 380 320 220 200

Table 2: Sales expectations for Kota Fibres (in Rs000)

(a) (10 points) Complete Kota’s monthly cash budget from September 2003 to December

2003 using the above figures. Under the current assumptions, is Kota

repaying its line of credit by the end of December?

Answer: Kota’s purchases in a given month are 70% of the sales expected two

months later, and all purchases are made cash. For example, cash purchases in

Septenmber are 70% of sales in November. Cash disbursement from September

to December are as in Table 3. Note that interest payments in a given month

depend on the line of credit at the end of the previous month and thus cash flows

in a given month must all be determined in order to compute the cash flows in

the following month. Cash receipts, on the other hand, are as in table 4, and the

cash budget is depicted in Table 5. Note that assuming a line of credit balance

of Rs45,000 at the end of August implies that ending cash in August, and thus

beginning cash in September, is −Rs20, 000. We can see on the cash budget table

that Kota’s line of credit is not reimbursed at the end of december, so something

has to change in the way it runs its business.

(b) (20 points) Using sensitivity analysis, compare Kota’s debt at the end of December

under