Working Capital Simulation: Managing Growth
June 15, 2015
Professor William Mellett
Taking this Corporate Finance course has helped me gain the knowledge to view this simulation and provide a summary of why I made the decisions I did. If this was real-life and I was the CEO of Sunflower Nutraceuticals (SNC) I would need to be able to perform this analysis of the company. The analysis of the simulation and the decisions made will to increase SNC’s working capital and maximize SNC’s growth. According to Investopedia (2015), working capital ensures a company, like SNC, has sufficient cash flow in order to meet its short-term obligations and operating expenses. This paper will ...view middle of the document...
I decided to not to acquire Atlantic Wellness because I wanted to free up cash and the deal would result in inventory and accounts receivable suffering. This would put a strain on cash on hand, which was too risky for me.
II. Leverage Supplier Discount – I accepted working with Ayuveda Naturals, the supplier of herb for Nutrilife to obtain its product line which will allow a benefit to sales of approximately $2 million, offers a very attractive payment terms, and could lower SNC’s accounts payable.
III. Tighten Accounts Receivable – I decided to drop Super Sports Centers, which accounts for 20% of SNC’s sales. However, Super Sports Centers takes approximately 200 days to pay their bills with SNC, which is above the normal 90-day average. Dropping Super Sports Centers will cost SNC sales of $2 million per year, free up cash, and decrease SNC’s DSO.
IV. Dropping Poorly Selling Products – SNC has more than 100 products and it is feasible to drop some poorly selling products. Reducing those items will allow SNC to reduce DSI by approximately 3 months, cut its EBIT’s by approximately $50,000, will cut sales by $1 million, but will free up inventory space to stock more of their high selling popular products.
Phase 2 gave me three opportunities to make decisions. Those opportunities included:
I. Pursue Big-Box Distribution – SNC created a partnership with Mega-Mart. This partnership could result in an increase in sales for SNC by approximately 25%, 10%, and 5% during 2016 – 2018. SNC’s EBIT declined as a result of this partnership decision.
II. Expand Online Presence – SNC would like to expand their operations into new retail markets. SNC was offered the opportunity to partner with Golden Years Nutraceuticals, which would allow SNC to reach a larger, more diverse client base. Based on these benefits we did partner with Golden Years Nutraceuticals. From 2016 -2018, the partnership reduced SNC’s DSO figures due to online sale payments are collected more rapidly. SNC saw an approximate increase in sales of 10% in 2016, 5% in 2017, and 3% in 2018. SNC’s accounts receivable by seven days in year one and an additional three days in year two for a total improvement of ten days.
III. Develop a Private Label Product – I approved the opportunity SNC had to develop a private label products for Fountain of Youth Spas. The results of creating the private label products include increasing sales by approximately 5%, 4%, and 3% in 2016 through 2018, increase EBIT margin by 2%, and increasing SNC’s DSO and DSI.
During Phase 3 of the simulation, there were three opportunities for SNC to consider. Those opportunities included:
I. Acquire a High-Risk Customer – SNC accepted taking on the high-risk customer, Midwest Miracles. Midwest Miracles is high-risk because of their excessive debt and risky financial situation. But the advantages outweigh the high-risk. Sales will increase by approximately 30% in...