Working Capital Simulation Paper j616l

Running head: WORKING CAPITAL SIMULATION- MANAGING GROWTH

Working Capital Simulation- Managing Growth Debra Rogers Duncan FIN571/ Finance August 31, 2015 Tony Mahone

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Working Capital Simulation- Managing Growth Sunflower Nutraceuticals is a privately held nutraceuticals distributor based in Miami, Florida in 2006. SNC has been expanding for the past several years to improve their financials, specifically Sales, Earnings before Interest and Taxes (EBIT), Net Income and Cash Flow. As CEO I am tasked with making decisions in three phases with each phase lasting three years by applying principles of capital budgeting to invest in growth and cash flow improvement opportunities over the next 10 years. Sunflower Nutraceuticals (SNC) was founded in 2006 in Miami, Florida. The company is internet- based direct-to-customer distributor and retailer of dietary supplements including vitamins, minerals, and herbs for women, with product offerings for all age groups. Since its founding the company expanded with new retail outlets and launched several private-label brands, including a women’s sports drink, metabolism-boosting powders, and a vitamin line for teenage girls. The company has struggled in the last several years breaking even basically due to annual flat sales growth on total revenues of $10 million (Harvard Business School Publishing, 2012). Phase I of Simulation (2013-2015) The initial phase of the simulation included four opportunities for SNC to maximize its growth potential. The SNC executives acquired a new customer, tighten s receivable, and discontinue selling products chosen by executives. The decisions were based on improving the company’s cash flow and cash cycle. As a result of tightening s receivables Super Sports Centers were dropped and the company proceeded to acquire Atlantic Wellness as a customer to off-set some negative impacts.

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Adding Atlantic Wellness increased sales, but the results were higher s receivables, which lead to SNC executives to drop selling poorly sold products. These decisions were based on improving the company’s cash flow and cash cycle. The decision to add Atlantic Wellness as a customer was a good choice to off-set negative impacts. Atlantic Wellness addition’s direct impact was increased sales; however s receivables and inventory balances were also increased. Sales increased to $11,000,000 from $10,000,000 in previous years. The sales remained the same from 2013-2015. Phase I advised Earnings before Interest and Taxes (EBIT) was between $370,000 and $650,000 pre-phase I. During Phase I EBIT increased to $715,000 in year 2013 and remained the same from 2014 and 2015. Net Income before phase I was $156,000 in 2010, decreased to $62,000 in 2011, and increased to $236,000 in 2012. During Phase I net income increased in the following years $292,000 in 2013, $314,000 in 2014, and $329,000 in 2015. Phase I yielded $0 in net cash for three years. Phase I had a total value of $466,000. Phase II of Simulation (2016-2018) SNC selected in Phase II (2016-2018) to pursue big box distribution, expand online presence, and develop a private label product for Fountain of Youth Spas were selected. The basis for these decisions was to increase their sales and to continue to work on cash flow. With the addition of big box distributor, Mega Mart, as a customer resulted in top line growth for the company however, causing EBIT to decline. The expansion of online presences increased sales without negative impacts to the company. Sales in Phase II rose from $11,000,000 in 2015 to $15,400,000 in 2016, $17,842,000 in 2017 and finally in 2018 to 19,340,000. EBIT increased in Phase II $1,163,000 which was up from $715,000 in 2015, $1,324000 in 2017 and at the end of Phase II EBIT was $1,425,000.

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Net income also increased in Phase II, and the end of Phase I $329,000 to $614,000. In 2017 Net Income nominally increased to $668,000 and in 2018 net income ed at $727,000. Net Cash flow yielded $0 results. Based on the company’s decisions in Phase II $804,000 was added to the value of the company. Phase III of Simulation (2018-2021) The final Phase of simulation Phase III, Sunflower Nutraceuticals Plan to decide whether to acquire a High-Risk Customer with a significant impact on Sales but has a risk of possible bankruptcy and substantial problems with Cash Flow. The company would need to renegotiate supplier credit , and/or adopt a global expansion strategy by adding a family-oriented vitamin retain chain resulting in modestly increasing sales with similar margins as of existing businesses. With this in mind, DSO would be reduced as the new business would pay upon deliver to shipping points. The company decision to renegotiate credit and adopting a global expansion strategy resulted in topline growth, with a small increase in cash tied up with the inventor, s payable were significantly lower as well as improved margins. Sales increased by 7.5%, EBIT increased to $1,498K for year 2021 compared to $1,147K in 2018 and $650 in 2012. The increased EBIT and free Cash Flow allowed SNC to reduce nothing to dependence on credit line, $159K in 2021 vs $3,332 in 2012. The results of the nine year 3 part Phases showed Sunflower Nutraceuticals creating addition value of $1,399k for nine year period. In conclusion, Sunflower Nutraceuticals underwent substantial changes during the 9 years analyzed, but the results were significant, top line increased from $10,000K in 2012 to $14,458K in 2021, positive cash flow was reported in 8 out of 9 years, allowing the company to almost eliminate the need for external financing. The sales addition did not yield a significant increase in cash being tied to inventory levels not did it result in uncontrolled increase in

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Receivables, DSO was reduced from 110-95, and only increasing DSI from 90 to 96. The decisions management made during the 9 years 3 Phase Plan by carefully selecting which business decisions to undertake, balancing top line growth, by developing Private-Labels, and adopting a global expansion strategy, and installing cash flow control measures such as credit , renegotiating and tightening the s receivable policies and processes, Sunflower Nutraceuticals was able to grow its business, expand its product line, increase free cash flow, create value, while eliminating the need for external financing, positioning itself perfectly for additional expansion both nationally and globally when and if the need arises.

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References 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]. Retrieved from University of Phoenix, FIN571 website.