BankingThe Journal of Finance

Question: Discuss about theBanking for the Journal of Finance. Answer: Introduction: Sengupta Fibres Limited had overdrawn its bank account which made delay because the company would not disclose the trucks for departure because the tax of excise had not been paid. To regain the economic condition and plans for restoring the liquidity of firm, the company needs to take some tough decisions for the recovering favorable conditions of the company (Woodford 2012). The company is mainly focusing the issues of cash management and thus results negative balance in their bank account. In other words, the company failed to manage the working capital in their daily operations, despite the company is sustained with high domestic demand from the local domestic mills, filled their yarn requirements from suppliers such as Sengupata Fibres. Furthermore, the company is considered to be a profitable enterprise, though the company is highly dependable on the bank and concerned about increasing loan demand day by day. Sengupta Fibres Limited is currently more concerned about the companys line of credit from All-India Bank Trust Company where it has also maintained its cash balances. This has been observed and anticipated that the company could be more impossible to repay the loan amount because there is a high chance that inflation and interest rates might increase in the coming year. Therefore, the company requires more liquid capital (Ostry et al. 2012). In that context, this is an important note that the company had grown at an annual rate of 18 percent in 1989 and net profit reached at Rs 2.6 million in that same year. This figure indicates that the company ensured growth in sales because of the high fabric demand in the market but at the same time, the company had run huge cost of goods sold which was increased for the recent years because of enhancing price competition (DeAngelo and Roll 2015). Moreover the operating expenses of the company would also increase about 6 percent of sales. Ther efore, two strategies need to be made by the company: firstly, the healthy working capital and secondly, to reduce operating expenses. There are eight ways the company can improve their working capital position. For this, the finance handling officers of Sengupta Fibres limited needs to manage working capital actively throughout the organization. The cash-focused management system should be an active process. If there is a need to provide awareness training at management level then the company shall introduce active training sessions on new processes at operational level. Secondly, the company needs to consider the alternative funding to get the enough funds on hand. To increase the credit line with the help of the bank- bank loans and overdrafts are not only source of working capital. The company can invest in long term fixed deposit. By this alternative funding, the company gets the high interest return. In this way, the dependency on All-India Bank and Trust Companys 16 percent i nterest will be reduced and thus the company can recover their stable working capital. On the other hand, firms are turning the asset-based finance such as invoice discounting can be another option to raise finance (Etiennot, Preve and Sarria-Allende 2012). Thirdly, Sengupta Fibres Limited, the company needs to pay their suppliers within a specified credit terms. For instance, it requires 60 day payment terms to commercial business transactions. By this approach, the company will get their dues on time and it would be easier for them to maintain the credit balance and a smooth cash chandelling as well. In this context, the company can benefits from discounts through early payment. In this way, the company could maintain a healthy working capital and regain the confidence in their future final position. On the other side of the business, unit growth in the industry was expected to be 15 percent per year and the merchants maintained relatively low levels of inventory during the non-seasonal phase and high levels of inventory at the time of pick season. Here the strategies need to be taken for making a stronger inventory management system so that the seamless operations can be possible. Currently the company is receiving many complaints from their customers due to ineffective distribution system. Though the company has taken policies against overproduction and overstocking, Sengupta Fibres Limited faced problem in receiving the finished yarn quickly from the factory in Kota to the customers. The company needs to take care of the fast billing processing during the unloading final products so that consumers get their order on time (Robinson 2013). To improve the financial position, there are few actions needs to be taken for reducing the operational costs. The suggested actions for redu cing operating expenses are as follows: Reduction of costs of goods sold Increase sales revenue Decrease the reduce labor and operating costs An effective audit utilities and insurance Furthermore, the company should plan for contingency fund for avoiding financial crisis for the future such as downwards economy, reduction rate of interest and so on. This fund can be used for equity financing also. In this way, the company could improve their annual income in 1990 and regain their financial position as well. References: DeAngelo, H. and Roll, R., 2015. How stable are corporate capital structures?.The Journal of Finance,70(1), pp.373-418. Etiennot, H., Preve, L.A. and Sarria-Allende, V., 2012. Working capital management: an exploratory study.Journal of Applied Finance (Formerly Financial Practice and Education),22(1). Ostry, J.D., Ghosh, A.R., Chamon, M. and Qureshi, M.S., 2012. Tools for managing financial-stability risks from capital inflows.Journal of International Economics,88(2), pp.407-421. Robinson, J., 2013.The accumulation of capital. Palgrave Macmillan. Woodford, M., 2012.Inflation targeting and financial stability(No. w17967). National Bureau of Economic Research.