Table of Contents

Executive Summary
Introduction
Recommendations
Analysis
1. Analysis of Guna’s Current Situation
2. Evaluation of the transportation manager’s proposal
3. Accept the transportation manager’s proposal and halt dividend payouts until bank loan is repaid
4. Results of our recommendation
5. Evaluation of the operations manager’s proposal
6. Cautions to be taken in inventory management
Implementation
Conclusion
Exhibits

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Executive Summary
1. Guna Fibres, Ltd.’s Current Financial Situation
Guna Fibres, Ltd. (Guna) is heavily dependent on its bank loan to fund its short-term operations.
The terms of All-India Bank & Trust Company’s (All-India) bank loan specify that Guna must reduce its seasonal line of credit to a zero balance for at least 30 days each year. Financial statement forecasts currently indicate that Guna will not be able to clean up its loan by the end of
2012.
If Guna does nothing to rectify its financial situation immediately, the lending officer at All-India will refuse to extend any more seasonal credit to Guna. A refusal to extend seasonal credit to
Guna will severely affect the company’s operations and may, in the extreme case, force a bankruptcy as the company runs out of cash.
Guna is encountering difficulties in its short-term bank loan repayment largely due to lower profit margins in 2011 despite a rapid rise in sales of 18%. The lower profit margins can be attributed to an increase in both operating and interest expenses.
2. Our Recommendation and Analysis
Three potential options exist to tackle Guna’s current financial trouble:
1) Adopt the transportation manager’s proposal to reduce raw-material inventory requirement from 60 days to 30 days.
2) Adopt operations manager’s proposal to undergo a scheme of level annual production where purchases under level production be altered to INR 50