Sengupta Fibres Ltd. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question No. 1: What is the current situation? Why did the company run out of cash? What are the possible consequences for the company?

Answer:

The company Sengupta Fabrics Ltd was incorporated in the late 1960’s with its major focus on the productivity of nylon fiber. The company started its operations with a single plant situated in Kota, India, whereas, the business was run by Mrs. Sharma, who happened to be the owner and the managing director of the company. The company produced synthetic fibers which were in great demand for making the traditional Indian dress known as saris. Production of nylon is carried through using the local materials, but with advanced technology. The company mainly dealt in the industrial marketing where the finished goods of Sengupta Fabrics were purchased by other domestic companies for the purpose of manufacturing clothes for saris and other dresses. Similarly, the consumers in the end purchases the end product from the cloth merchants.

The finished goods from the textile mills offered to the merchants are mostly provided on credit. However, due to the purpose of capturing a huge market share the yarn manufacturers also provide their material on credit due to which very low percentage of credit is given to these yarn manufacturers by their suppliers. Sengupta Fabrics have also been the victim of financial crisis in the early 1990’s when it suffered with a liquidity crisis while still the company had been generating profits. Many problems were faced by the company as the company did not meet the requirements of customers as it did not dispatched customers’ orders. This problem occurred because of not paying the excise duty and also the taxes in cash as outlined by the government. The company’s bank accounts were overdrawn, the information which was discovered by the bookkeeper.

The truck was also unloaded by the truck drivers without waiting the decision from the government or the company. Therefore, the truck suppliers claimed damages for their losses in profitability and their loss of customers. This resulted the company’s owner to approach the All India Bank and trust company. The idea was to draw loans from the bank in order to clear the excise tax. The bank asked the company in providing them with the financial statements and conditions along with company’s future plans for restoring its company’s liquidity.

The company ran out of cash because of the arrangement and allocation problems of working capital. For only two months of the year, the yarn plant uses to operate at its peak capacity, however, in the rest of the year the plant use to run at the modest levels. In most of the year the company was more likely to depend on loans from the bank since their bestselling months use to start. The company had established two alternative distribution warehouses. However, the poor and narrow conditions, the logistics were prone to accidents and also slowed down their transportation time. The company also had failed to pay off their short term debt, and also failed to comply with the delivery system which made the availability of cash much weaker. The company also had contracts with the All India Bank for its credit line, however the company had failed to cleanup their loans which made a burden of debt over the company.

The failure to pay off the debt to the All India Bank had created a stir amongst the bank officials and it was ordered that none of the seasonal credit shall be provided to the company. This news had greatly affected the company’s stance by their owners, and worked to manage their financial conditions through preparing a financial forecast for the year 2001 but considering other set of assumptions. This had been a very critical situation for the company because at the same time they had to fulfill short term obligations and also extending their credit line. However, the major problem had remained the repayment of the loan which was taken from the bank. Although the company had been gaining profitability due to its production, the company also was taking loans from the bank at regular intervals. This created two major problems for the company. The first major problem arises that it loses its credibility in the market and shall be marked as blacklisted, while on the other hand the company would lose the opportunity of being financed from any other financial institution.........................

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In January 1990, the executive director of this little yarn production company must decide surprising lack of funds. Problems for students are to assess the reasons for this deficit (using the full base case forecast given in the case), and then evaluate the utility of various possible remedies proposed by the managers. In fact, the company is not able to eliminate seasonal workers debt to need 30 days each year. This situation arises from two classical reasons: secular growth, and reduced profitability. Possible solutions include reducing the inventory of finished products through more efficient transport and storage, reducing credit terms to customers, just-In-Time (JIT) delivery of raw materials, and the transition from the seasonal production levels. This case is a thorough implementation of the working capital analysis and concepts. "Hide
by Thien T. Pham, Robert F. Bruner Source: Darden School of Business 18 pages. Publication Date: March 29, 1991. Prod. #: UV2264-PDF-ENG