The problem that the firm Guna Fibres is facing is that they lack sufficient cash flow from operations to meet their day-to-day financial obligations. Guna Fibres has become dependent on a revolving line of credit from the All-India Bank & Trust Company and due to increasing operating expenses and costs of good sold Guna Fibres is no longer able to remain solvent based on their current financial practices.
Guna Fibres is a textile manufacturing company located in India that is subject to seasonal swings in demand as well as an increasingly competitive environment. Guna Fibres has historically utilized a line of credit from All-India Bank & Trust to finance the purchases necessary to fulfill
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Notice that while the total cash flows from financing is only 704K Rupees the reason for the decrease is that a dividend in the amount of 2,000,000 was paid to shareholders. In addition to the concerns about Guna Fibres reliance on the line of credit is the dearth of cash flow from operations, only 330k Rupees for 2012. Changes to Guna Fibres cash management policy could help to reduce the problems that Guna Fibres is currently facing. By examining Guna Fibres policy of paying shareholder dividends each quarter as well as their policy of keeping 750K Rupees on hand at all times one can begin to see where these policies place additional pressure on the firm to borrow. Examine Exhibit 4, which is Guna Fibres Statement of Cash Flows if they had decided not to pay a dividend. Notice the highlighted cell indicating that change in notes payable for year ending in December 2012 have decreased to 626,000. Overall, net change in Cash Balance remains essentially the same demonstrating that a large portion of Guna Fibres financing needs in 2012 are to fund paying a shareholder dividend. As stated by the firm, Guna Fibres believes that funds are more secure in the hands of the company’s shareholders. However, this assumption is likely based on the belief that dividends are paid out of net profit where the shareholders can earn a return elsewhere in the market place. In this case it is unlikely that the shareholders