Guna Fibres, Ltd. – Case Solution

Case study questions answered in the first solution:

1. Guna Fibres Ltd. has the policy to maintain a minimum cash balance of 7.5M. Therefore, the plug variable would be the “note payable” account, and the amount of “note payable” in a sensitivity analysis would exemplify the magnitude of the influence that each factor has on their cash shortage. As such, the level of “note payable” could be seen as inversely proportionate to the level of “cash,” meaning that a high level of note payable would mean a shortage of cash.
2. As seen from the Excel snapshot, when a reduction of inventory is implemented, it significantly reduces the number of notes payable to 6.9M, as it reduces the amount of capital held in inventory, which frees up more cash for payment of A/P and notes. Therefore, this solution would be able to greatly reduce the severity of the firm’s seasonal problem but not solve it entirely.
3. What is your recommendation for Kumar in terms of solving her company’s current financial problems?

Case study questions answered in the second solution:

1. Is Guna Fibres, Ltd. a financially healthy business? As part of your assessment, consider the return on assets of the business.
2. Examine Vikram Malik’s monthly financial forecast. Why do Guna’s financial requirements vary across the year? What are the key determinants of Guna’s borrowing needs?
3. On the basis of Malik’s forecast, how much debt will Guna need to arrange for the coming year? Will Guna be able to zero out the line of credit this year? If not, what is the cause of Guna’s ongoing need for debt?
4. Using the monthly forecast model, do you expect that the two proposals would relieve or worsen Guna’s ability to clean up its bank loan?
5. What other steps can Malik take to reduce Guna’s cash problems? What are your recommendations for Surabhi Kumar?