Working Capital Simulation
Working Capital Simulation
This paper will analyze the Sunflower Nutraceuticals (SNC) and the decisions their company can make to increase working capital and maximize the organization’s growth potential. Moreover, this paper will examine some of the decisions made in each phase of SNC’s simulation, describe how SNC’s decisions affected their working capital, and evaluate the general effects associated with limited access to financing.
Sunflower Nutraceuticals (SNC) is a privately owned nutraceuticals distributor that provides consumers, distributers, and retailers with dietary supplements such as, herbs for women, vitamins, and minerals. In 2006, SNC expanded their business into several new retail outlets within the nutraceuticals industry. SNC found success introducing their own brand of sports drinks, vitamins for teenage girls, and metabolism-boosting powders that helps to increase women’s metabolism. SNC has the potential to grow into one of the main distributors in the nutraceuticals industry. However, SNC struggled to break even on more than one occasion, as well as exceed the company’s credit line of $3,200,000 to finance payroll and operational needs. Because of their restrictive financing options, SNC must only use a small percentage (approximately 12%) to evaluate, and invest in new business ventures and opportunities in national and international retail markets.
SNC’s Simulation (Years 2013-2015)
During the first phase of the simulations, SNC was presented with four opportunities that could help their company maximize their growth potential. The first opportunity was to acquire a new customer. The company is considering adding Atlantic Wellness, a successful health food chain. By taking on this new customer, SNC will increase sales by $4 million per year and EBIT by $260,000. However, the profit margins and net working capital terms would remain the same. The second opportunity is leveraging their supplier discount. SNC accepted the Atlantic Wellness contract to increase company sales of $4 million. SNC also accepted Ayurveda Naturals and that contract offer is favorable to SNC as its payment terms are 2/30 with a net gain of 60. SNC could lower its AP to $153,000 if it were to pay Ayurveda Naturals within 30 days, and that payment will give them a discount of 2% on some of their raw materials.
The third opportunity is to tighten accounts receivable. Because 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 are well above the normal 90-day average. To resolve this issue, SNC could drop Super Sports Centers and improve their DSO number; however, that come at a cost, as SNC’s sales would drop $2 million. The last opportunity presented is to discontinue the company’s poorer selling nutraceutical products.
Because SNC have more than 100 SKU’s products in their stock, some of those products can be dropped off SNC’s inventory because those products are not considered and every-day purchase items for most SNC’s consumers. Reducing or discounting those items will allow SNC to reduce its DSI to 86 days, cut its EBIT by 65k, drop sales to $1 million, and create additional room for the more popular, and higher selling inventory products. Doing this will rationalize the SNC’s SKU count.
SNC’s Simulation (Years 2016-2018)
During phase two of the simulation, SNC was presented with three different opportunities. The first opportunity is to pursue big-box distribution. SNC established a partnership with sales giant Mega-Mart, and that decision allowed SNC to see an increase in sales of 25%, 10%, and 5% during 2016-2018. In addition, this decision dropped SNC’s from 6.5%, to 6%; however, their bills were paid on time causing SNC’s DSO to drop. Beginning a partnership with Mega-Mart is a good idea. However, this partnership will drop margins and reduce SNC’s EBIT. The second opportunity is to expand the company’s online presence. Because SNC wishes to expand their operations into new retail markets, its company was presented with an opportunity to collaborate with Golden Years Nutraceuticals.
The purpose of the partnership is so 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 collect more rapidly from seven, to three, to two days throughout the duration of 2016-2018. Moreover, SNC also saw a 10%, a 5%, and a 3% increase in their sales from 2016-2018. This will be 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.
The third opportunity is to develop a private label product. SNC has a partnership with Fountain of Youth Spas, and Fountain of Youth Spas wishes 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%. 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.
SNC’s Simulation (Years 2019-2021)
During phase three of SNC’s simulation, there were three opportunities for SNC to consider. The first opportunity is to acquire a high risk customer. 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 SNC sales by 30% in 2019. Midwest Miracles is a potential risk for SNC as their company has a 20% chance of going bankrupt and a 50% chance of a full recovery. Other effects of this client, include a likely increase in DSO by 190 days, and higher fees, with a longer than average invoice pay-period. The second opportunity is to renegotiate 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 (SNC wanted 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 $200,000 and their AR by $812,000. The last opportunity is to adopt a global expansion strategy. SNC acquired a new Latin American 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 by 2 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.
SNC’s Final Metrics Results
Final Metrics Results (Figures Reflect 2013-2021):
EBIT (600% Increase): Figure went from $440 to $3080
Sales (213.4% Increase): Figure went from $10,000 to $31340 Net Income (985.90% Increase): Figure went from $156 to $1694 Free Cash Flow (406.03% Increase): Figure went from $365 to $1847 Total Firm Value (60.38% Increase): Figure went from $3,248 to $5209 General Effects of Limited Access to Financing
There are several general effects limiting access to financing, which can have several effects on entrepreneurs trying to start or grow his or her businesses. For example, limited access to financing may lead to higher interest rates on a business loans, credit fees, or force a business to face a complicated and expensive entry (registration costs, policies, equipment fees, etc.) and exit procedures (Parrino, Kidwell, & Bates, 2012). Furthermore, limiting the amount of growth (profits, SME, consumer/client base, etc.) a company can have in a given new market would have the same affect. Furthermore, making it more challenging (longer and more expensive process) to implement property and intellectual rights of privately owned and developed brand products.
In Summary, the SNC simulation showed us managing growth and capital can become quite a challenge in today’s business markets, especially if a company has limited financing or takes on business partnerships they cannot financially support with their credit line or resources.
Harvard Business Publishing. (2014). Working capital simulation: managing growth. Retrieved from, http://forio.com/simulate/harvard/working-capital/simulation/?#page=dashboard. Parrino, R., Kidwell, D. S, & Bates, T. W. (2012).Fundamentals of corporate finance (2nd ed). Hoboken, NJ: Wiley.