Financial Management

Q2 Exhibit 7 illustrates that Guna’s cash position ﬂuctuate with its seasonal business cycle. Cash outﬂow rises in the beginning of the year and peaks in May, when purchases, inventory, operating and labor costs are the highest due to seasonal production. Cash inﬂow is low in the beginning of the year, consistent with modest sales, and peaks in August, about two months after peak sales seasons, before declining again. Hence, there is a 3-month lag between peak cash inﬂow and outﬂow due to pre sales season production and sales on credit terms. As a result, Guna’s net operating cash position is negative from January to June, but positive from July to December. In turn, this makes Guna’s cumulative cash position negative from January to August, with most negative being June (-INR26M), Guna’s highest sales month. For these eight months of the year, Guna needs cash ﬁnancing from the line of credit to cover cash shortfalls, despite the fact that it is able to end the calendar year with a positive INR11M cumulative cash balance. In Q3 to Q5, comparisons are made between the proposed action and base case. Q3.1 With dividend reduced to zero, peak debt and end of year debt are reduced by 3% and 54%, respectively. Guna exits 2012 with 2 times 2011 debt as opposed to 5 times. The policy also results in signiﬁcant monthly interest expense savings between April to December for a total of INR112,000, which contributes to a 6% increase in net proﬁts. The revised FINANCE PORTFOLIO 15 dividend policy also increases shareholder equity by INR2M at year-end. While ROE decreases from 9% to 8%, as leverage decreases, Guna’s balance sheet is stronger with the additional shareholder equity. Q3.2 Slowing sales growth to 2011 level reduces Guna’s debt by 13% at peak level, but increases its year-end debt by 1%. Additionally, full year net proﬁt decreases 27%, reducing proﬁtability ratios ROS and ROE to 1% and 7%, respectively. Under this proposal, break-even gross margin percentage is 10%, and gross margin forecasted to be 11% in 2012, Guna will be subjected to higher ﬁnancial risk. Q3.3 Reducing purchases from 55% to 51% of gross sales lowers inventory costs, and improves gross margin to 17%. Further, as Guna uses less debt to ﬁnance its inventories, it lowers monthly debt and interest expenses by 18%, and increases net proﬁt by 302%. Reducing direct labor costs from 34% to 30% of gross sales lowers COGS, thereby improving gross margin to 14%. It also reduces monthly debt 7% and allows improve net proﬁt 124%. By reducing operating expenses from 6% to 3% of gross sales, Guna experiences a decrease in monthly debt and an 8% reduction in interest expense, allowing Guna to improve net proﬁt 168%. The change leaves FINANCE PORTFOLIO 16

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