The working capital simulation has allowed us to analyze the financials of Sunflower Nutraceuticals Company(SNC). The decisions made by the CEO increased the working capital and maximized the overall organizational growth potentially with respect to time. Moreover in addition to various details of the SNC firm we have also examined various decisions which took place in each of the phase of SNC’s simulation which has an estimated values to figure out the results. The paper also describes how SNC’s decisions are influenced with respect to their working capital followed with the final step of evaluating the general affects associated with the limited access of financial mix.
Sunflower Nutraceuticals (SNC) Background
SNC is a privately owned Nutraceuticals company and is a wide distributor which provides all the vital dietary supplements such as herbs for women’s, vitamins, and minerals for all the consumers (mainly women’s), distributors and retailers. (Harvard Business School Publishing, 2012). Once the business was initiated after 2006, SNC expanded their operations and came up with various retail outlets in the nutraceutical industry and has been successful while introducing their own brands of sports drinks, vitamins for teenagers, metabolism- boosting powders, etc and various other products from a same product line which enhance the metabolism system of humans.
Although the potential to grow as one of the major nutraceutical distributors in the, they are still struggling to break even and on more than one occasion have been forced to exceed the company’s credit line ($1,00,000) to finance the payroll and other operational needs. Because of the organization’s somewhat restrictive financing options, they are only able to use a small percentage (approx. 10%) to evaluate and invest in new business expansion which resembles great opportunities in other retail markets across the globe.
Phase 1 of SNC’s Simulation (Years 2013-2015)
During the initial phase of the simulation, they presented four major opportunities which could be helpful for their company to maximize their growth, those opportunities includes- Discontinuing their Poorer Selling Nutraceutical Products –since they have more than 100 products, some of those products can be dropped off SNC’s inventory because they are outdated. Reducing or discounting those items will allow SNC to a) reduce its DSI to approximately 3 months, b) cut its EBIT by 50k approximately, c) drop sales to 1mm, and d) create more inventory space for the popular products. Doing this will rationalize the SNC’s SKU count. Leveraging their Supplier Discount –SNC is considering an offer to add Atlantic Wellness (a large successful food chain) to their nutraceutical product line. The company considered and accepted the Atlantic Wellness contract as it allows them to increase company sales to 2k. In addition to their contract offer with Atlantic Wellness, SNC also considered the acceptance of Ayurveda Naturals with the contract offer which was favorable to SNC as its payment terms reflected a net gain of approximately 50.
They could have lowered its AP if it was related to pay of Ayurveda Naturals within a month and that payment can increase a discount of almost 2% on some of their raw materials. Acquiring a New Client – SNC acquired a new client by acquiring the services of health food giant Atlantic Wellness to their nutraceutical products line. This decision increased SNC’s EBIT by approximately 200,000 and thus their sales figures. Although SNC’s sales and EBIT figures increased, their net working capital and profit margins will remain at current figures. Additionally, acquiring Atlantic Wellness as a client will help increase SNC’s sales significantly, but the increased sales come at a cost as the increased sales will decrease inventory and accounts receivable. Sacrificing inventory and accounts receivable is not a good deal for SNC because of their current cash position as SNC must keep a minimum of amount of cash on hand to meet their company’s operational needs.
However, there is a positive lining for SNC as the risk of inventory and accounts receivable could be balanced by negotiating a profitable deal with merchant Ayurveda Natural. Limiting their Receivable Accounts – Since Super Sports Centers account for 20% of SNC’s sales figures, those receivable accounts takes the company approximately 200 days to pay and those 200 days is well above the normal 90-day average. To resolve this issue, SNC could drop Super Sports Centers and improve their DSO number, but that come at a cost as SNC’s sales would drop drastically. Phase 2 of SNC’s Simulation (Years 2016-2018)
During phase two of the simulation, SNC was presented with three different opportunities and those opportunities include: Expansion of SNC’s Online Presence –Since SNC would like to expand their operations into new retail markets its company was presented with an opportunity to partner with Golden Years Nutracueticals so that they could reach a larger, more diverse consumer base. From 2016-2018, this partnership reduced SNC’s DSO figures because its web sales began to be collected more rapidly from few days almost 7 to 2 days throughout the duration of 2016-2018. Also SNC also saw about 10%, increase in their sales from 2016-2018. This was an ideal opportunity for SNC as it will allow them to increase their sales with having little-to-no effect on the company’s working capital.
Take up Big-Box Contributions – SNC established a partnership with sales giant Mega-Mart, and that decision allowed SNC to see increase in sales of 25%, 10%, and 5% approximately during 2016-2018. Additionally, this decision dropped SNC’s from about 1%, however, their bills were paid on time causing SNC’s DSO to drop. Beginning with a partnership with Mega-Mart is a good idea. However, this partnership will drop margins and reduce SNC’s EBIT. Create a Private Label Product –SNC has a partnership with Fountain of Youth Spas, and Fountain of Youth Spas want SNC to develop their own private label product so that SNC can expand their nutraceutical products line and increase their sales and consumer base. Doing this would increase SNC’s 2016-2018 sales by 5%, 4%, and 3% approximately. Additionally, it will also increase margin by 2% while increasing SNC’s DSO’s and DSI. This partnership will allow SNC to increase their EBIT while slightly raising their accounts receivable figures. Phase 3 of SNC’s Simulation (Years 2019-2021)
During phase three of SNC’s simulation, there were three opportunities for SNC to consider, and those opportunities include: Adapt a Global Expansion Plan–SNC acquired a new Latin America client (Viva Familia), which helped SNC expand their business operations into Latin America. SNC’s partnership with Viva Familia allowed SNC to decrease their DSO for a couple of days because Viva Familia will cover delivery charges. However, this new partnership increased the company’s DSI by two days, and it also increased SNC’s sales by 2% with margins remaining parallel to current business. Renegotiate Current Supplier Credit Terms – SNC want to renegotiate its credit terms with other vendors so they used their main vendor Dynasty Enterprises (located in China) as leverage (suppose SNC needed a 3% discount for payment in 10 days) with other vendors. SNC could use their negotiation tactics with other vendors because their main vendor, Dynasty Enterprise offered SNC profitable terms of 2/10 with a net of 30.
This reduces SNC’s costs of sales by $3278 and their AR by $13112. Acquire a High-Risk Client –Midwest Miracles is a potential high-risk client for SNC because of Midwest Miracles excessive debt and risky financial situation. However, acquiring this client will increase the sales of future prospects of SNC sales by approximately 30% in 2019. Midwest Miracles is a potential risk for SNC as their company has lesser chance of going bankrupt as compared with the recovery. Other effects of this client, includes a likely increase in DSO by 190 days, and higher fees with a longer than average invoice pay-period. SNC’s Final Metrics Results
Final Metrics Results (Figures Reflect 2013-2021) Estimated values: EBIT (202% Increase): Figure went from $440 to $1,330,
Sales (27% Increase): Figure went from $10k to $12,672
Net Income (412% Increase): Figure went from $156 to $798
Free Cash Flow (124% Increase): Figure went from $365 to $798 Total Firm Value (56% Increase): Figure went from $3,248 to $5,082 General Effects of Limited Access to Financing
There are several general effects that limited access to financing can have on entrepreneurs trying to start or grow his or her businesses. For example, limited access to financing can lead to 1) higher interest rates on a business loans or credit fees. 2) Force a business to face a complicated and expensive entry (registration costs, policies, equipment fees, etc.) and exit procedures (Parrino, Kidwell, & Bates, 2012). C) Limit the amount of growth (profits, SME, consumer/client base, etc.) a company can have in that new market. D) Make it more challenging (longer and more expensive process) to implement property and intellectual rights of privately owned and developed brand products.
SNC simulation reflected the challenging ways of managing growth and capital of an organization in our present scenario. In the business market we can find many companies with limited financial power or take on business partnerships because they cannot financially support the business with their credit line or resources as it is more than estimated budgets. Hence, managing a company while managing the working capital and finances of the company is really a difficult task.
Harvard Business Publishing. (2012). Working capital simulation: managing growth. Retrieved from, http://forio.com/simulate/harvard/workingcapital/simulation/?#page=dashboard. BIBLIOGRAPHY \l 1033 Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.). Hoboken, N.J.: John Wiley & Sons.
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