The Harvard Business Simulation asked that one act as the C.E.O. of Sunflower Nutraceuticals (which will be referred to as SNC throughout this paper). Within the simulation there were phase in which decisions were made to help SNC with the growth of the company. This paper will explain the decisions made will influence SNC to estimate the value of the company, the working capital of the company, and evaluate the general affects associated with the limited access of financial mix.
Sunflower Nutraceuticals Background
SNC is a privately owned organization that is a large distributor and manufacturer of dietary supplements. The organization has a distribution network including direct customer sales, distributor sales, and retailer sales. SNC was established in 2006 as an internet company. The company soon opened a retail outlet store which also sold private labeled products. Although the organization is successful and has the potential of becoming one of the largest nutraceutial company’s in the United States the company has a problem breaking even. This has caused the organization to exceed its 1 million dollar credit limit several times over the years to finance payroll and other operating expenses. SNC has some restrictive financial options which only allows them to utilize a approximately 10% of working capital to diversify and expand. As the C.E.O. one made decisions that will allow the organization to grow working capital, and allow the organization to utilize these funds to expand and grow financially.
Phase I. SNC Simulation (2013-2015)
The initial phase of the simulation four opportunities were presented that has the potential to maximize the organization’s growth. Opportunity I. Acquiring a New Client – SNC made a deal with Atlantic Wellness, a successful health food organization and brought them in as a customer to distribute the herbal nutraceutical product line. The decision to bring Atlantic Wellness to the table increased EBIT by $ 200,000. Though sales and EBIT increased, the net working capital and profit remained the same. The addition of Atlantic Wellness does augment sales considerably, but will forgo segments of inventory and accounts receivable. Due to SNC’s current cash problems the organization must keep at least $300,000 on hand to meet the operational obligations. This means that sacrificing segments of inventory and accounts receivable may not be the best option. There are positives to this situation.
The threat of inventory and accounts receivable can be secured by negotiating a profitable deal with merchant Ayurveda Natural. Leverage Supplier Discount- By accepting the contract with Atlantic Wellness the company sales will increase. This in addition with considering a contract with Ayurveda Naturals, this is beneficial to SNC because the payment terms reflect a net gain and will allow the company to cover operational obligations. Tightening Accounts Receivable- To resolve some the accounts receivable issues SNC will have to drop Super Sports Center. Super Sports Center accounts for 20% of SNC’s sales figures, but Super Sports Center is constantly delinquent with payments. It is normal for Super Sports Center to take 200 days to pay accounts with SNC. This is well over the allotted 90-day agreement. Dropping Super Sports Center does come with a cost. Dropping Super Sports Cent will drop sales by $2 million.
Drop Poor Selling Products
There are 100 products that are not selling well. This increases the feasibility of dropping these products to create a deduction in DSI. Reducing or discounting these products will allow SNC to trim down DSI to around 3 months, and slash the EBIT by roughly 50 thousand, as well as create more inventory freedom for the accepted products. This will decrease the SKU count. This reduction in the number of SKUs has a negative effect on sales volume, but has a positive effect on the amount of cash tied up in inventory as a result streamlining the SKU numbers (Harvard Business Simulation, 2013).
Phase II. SNC Simulation (2016-2018)
In phase 2 there are 3 opportunities presented, these opportunities are: Pursue Big-Box distribution – SNC established a partnership with Mega-Mart, the organization saw an increase in sales during 2016-2018. This did come with a reduction in EBIT as a result of the decision. The partnership will still prove beneficial in the long-term. Expanding Online Presence- By expanding online presents SNC will have the opportunity to expand into new retail markets. SNC’s partnership with Golden Years Nutraceuticals has enabled the organization to attain a larger more diverse market. Between 2016 and 2018 there is an increase in sales and no negative impact to working capital. Developing a Private Label Product- Making an agreement to develop a private label product with Fountain of Youth Spas modestly increased EBIT margin modestly resulting in an increase in accounts receivable and inventory balance (Harvard Business Simulation, 2013).
Phase III. SNC Simulation (2019-2021)
Like phase 2 there are 3 opportunities presented in phase 3. These opportunities consist of: Acquiring a high risk customer- Midwest Miracles is a potential high-risk acquisition with excessive debt and presents a risky financial situation for SNC. Taking on Midwest Miracles will increase future sales in 2019, but will increase accounts receivable by 190 days and create a longer invoice pay out. The risk of Midwest Miracles is due to the resent rumors of the organization filing Chapter 11 bankruptcy. Renegotiate Supplier Credit Terms- Renegotiating credit terms with Dynasty Enterprises. Dynasty Enterprises is offering payment terms of 2/10 net 30, which is advantageous to SNC. These terms result in a lower accounts payable balance and improved margin. This renegotiation also has other benefits.
With the positive vendor response from a 3% discount if paid in 10 days SNC will have the opportunity to preserve their credit limit. Adapt a Global Expansion Strategy- SNC acquires Viva Familia, a Latin American company. This will help SNC expand operation to Latin America. This partnership will allow SNC to decrease the company’s accounts receivable to time of delivery due to Viva Familia’s willingness of pay upon delivery. Nevertheless, this partnership increased SNC’s DSI by two days, and in addition increased sales by 2% with margins outstanding equivalent to the existing business (Harvard Business Simulation, 2013).
SNC’s Financial Outcomes
EBIT: Increased from $440 to $3219
Sales: Increased from $10,000 to $33,751
Net Income: Increased from $156 to $1,778
Free Cash Flow: Increased from $365 to $1,931
Total Firm Values: Increased from $3,248 to 4,005 (Harvard Business Simulation, 2013). Effects Associated to Limited Financing
There are an abundance of general effects that limit access to financing. These affect are sometimes detrimental to an entrepreneur attempting to start a business. Having limited access to financing will cause the entrepreneur to endure higher interest rates on loans as well as limited credit options. These limitations will also cause a business to endure complex and expensive entry fees involving regulatory cost, registration costs, and equipment (Parrino, Kidwell, D.S., & Bates, T.W., 2012). Limited financing is also the detriment to the growth of an organization in new markets and create a challenge when executing copy rights and patens on privately owned and developed brands and products.
In the simulation there were decision made to create a profitable situation for SNC. These situations gave insight on different scenarios that are applicable to large organizations with the buying power to acquire different situations. As the acting C.E.O. it was important to make intelligent decisions that will help SNC to grow in the future while maintaining the limits that the organization set for their selves. These goals where achieved and the organization was able to gain a profit and increase cash flow. The organization was also able to reduce accounts receivable time along with a reduction in accounts payable. This is prefer within a struggling organization, but is not always the case.
Parrino, R., Kidwell, D.S., & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed). John Wiley & Sons, Inc. Retrieved from the University of Phoenix eBook database. University of Phoenix. (2013). Harvard Business publishing: Working Capital Simulation: Managing Growth assignment [Multimedia].
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