Hassle involved in expansion
Friday, 9 November 2007
Ahmed Showkat Masud
A garment factory with a capacity to produce 2,00,000 dozens of shirts in 300 working days will have to share extra orders, with another factory.
If buyers ask the factory owner that no sub contract will be allowed then the factory will be in need of expansion. Say, it will need to double its capacity for which it will need 1200 hundred workers and 800 sets of machinery.
Increasing the production capacity involves financial, industrial, managerial, entrepreneurial and other risks. An entrepreneur will invest from his own source if he has it. Otherwise he will have go to a financial institution for funding the import of capital machinery. With extra capacity, the factory will need more working capital. Before financing, the financial institution will evaluate the factory's existing financial condition, its leverage, liquidity, net operating margin, interest coverage ratio etc.
Besides these, the lending institution will analyse the industry condition. For example, RMG sector has been passing a tough time for couple of months. Lower consumption in the buyers countries, labour unrest in our country in the RMG sector), competitors in world market, etc., will be the judgement factors for the lending institution. The factory's previous track record with regard to compliance issues imposed by buyers countries will be another factor for the financial institution to judge.
Positioning of the factory with regard to global market place will be analysed by the lending institution alongwith its weakness. Its strength, opportunity, threat from rivals (for example, Vietnam for RMG sector) etc., will furthermore came under scrutiny by the lending institution. A second line of succession in the management will get priority of it (the lending institution).
(The writer works with One Bank Limited, Khatunganj, Chittagong)
A garment factory with a capacity to produce 2,00,000 dozens of shirts in 300 working days will have to share extra orders, with another factory.
If buyers ask the factory owner that no sub contract will be allowed then the factory will be in need of expansion. Say, it will need to double its capacity for which it will need 1200 hundred workers and 800 sets of machinery.
Increasing the production capacity involves financial, industrial, managerial, entrepreneurial and other risks. An entrepreneur will invest from his own source if he has it. Otherwise he will have go to a financial institution for funding the import of capital machinery. With extra capacity, the factory will need more working capital. Before financing, the financial institution will evaluate the factory's existing financial condition, its leverage, liquidity, net operating margin, interest coverage ratio etc.
Besides these, the lending institution will analyse the industry condition. For example, RMG sector has been passing a tough time for couple of months. Lower consumption in the buyers countries, labour unrest in our country in the RMG sector), competitors in world market, etc., will be the judgement factors for the lending institution. The factory's previous track record with regard to compliance issues imposed by buyers countries will be another factor for the financial institution to judge.
Positioning of the factory with regard to global market place will be analysed by the lending institution alongwith its weakness. Its strength, opportunity, threat from rivals (for example, Vietnam for RMG sector) etc., will furthermore came under scrutiny by the lending institution. A second line of succession in the management will get priority of it (the lending institution).
(The writer works with One Bank Limited, Khatunganj, Chittagong)