Working Capital Simulation Essay Sample
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Working Capital Simulation Essay Sample
Sunflower Nutraceuticals (SNC) is barely breaking even and is strategizing on methods improve its growth and cash flow through capital budgeting. This paper will discuss the decisions the CEO made in each area of the 3-phase process, and evaluate how the decisions affected SNC. The numbers in this analysis are in thousands.
SNC provides dietary supplements to individual customers and distributors. The company currently is only able to keep the minimum required cash on hand to run the business’ operations, and have had problems making payroll recently. The company and the nutraceuticals industry are relatively new. The company makes very little profit, and the business is working capital intensive. The client has limited working capital, which is defined as stock, debtors, and cash. These are the firm’s current assets.
In 2012, the company had current assets of $5,619 and a net worth of $1,765. EBIT was $650 and net income was $236. Sales were $10,000 at a cost of $9350. Our strategy was to acquire a new customer and tighten accounts receivable. We chose these options because we felt that it was important to find ways to make more revenue and try to prevent us from running out of cash. Businesses do not make money until their cash from the initial investment is converted back to cash. Tightening accounts receivable improves liquidity, and allows the company a smoother operational process. We decided to make it more challenging for customers to obtain credit and reduced our terms from 60 days to 30 days. This allows us to receive more of the money from our customers sooner. We took on a new customer, Atlantic Wellness, to help us increase our revenues and take advantage of economies of scale, which would lower our cost of goods.
It is less expensive to retain the customers that we have, and adding new customers will increase our inventory requirements and our accounts receivable, but we feel that since we are tightening our AR requirements, we will be able to convert the inventory and AR to cash sooner to continue to invest in our growth. Our cash cycle decreased and our AR collectibles dropped to 95 days from 110. Because of this strategy, we increased our free cash flow from – $264 to $510 in 3 years. Our Earnings before Income Taxes (EBIT) increased from $370 to $650 and our net income from $156 to $236.
The total value created was $328. Our credit line decreased and our cash position slightly decreased because we used a portion of our new cash flow to pay down on our short-term debt. These changes made in Phase 1 increased our Stockholder’s equity to $2,772 mainly because we became less dependent on our credit line and able to cover our operational costs. This was also because the company was able to increase its EBIT and decrease its interest expenses (lower credit line balances).
Our phase 2 strategy is to place our products in a large store chain that gives more customers access to our items. We felt that Mega-Mart Inc. would be the right store for us to expand our visibility. We could then sell in volume, although our margins may be lower. SNC chose Mega-Mart over expanding our on-line presence because we felt that it on-line sales would decrease our margins lower. This strategy increased our revenue growth substantially to $17,325. Our EBIT did not grow at the same rate as our revenues but it still increased from $780 to $1,039.
Net income did not grow at the rate of sales, but this is mainly because our cost of goods and our taxes increased. Our AR decreased from 95 to 90 days because we were now selling in a major store, and we were paid on the spot from Mega-Mart Point of sale registers. We were notified when it was time to restock the stores. Our cash cycle decreased 5 days since we contracted with a reliable, organized company like Mega-Mart. Our credit lines decreased to $2645 by the end of 2018. The result of Phase 2 allowed SNC to have a current ratio of 4.7. Between the 2 phases, our stockholder equity increased from $2,772 to $4,153
SNC wants to build off the momentum gained in phase 2 by further expanding their brand to reach the international markets. Mega –Mart has helped SNC become a national household name, so we would like to become an international competitor. Applying a global strategy will increase our revenue and our EBIT and allow us to keep our costs flat by contracting with international suppliers. At this stage in our business cycle, we are interested in maintaining steady growth, retaining as much of our earnings as possible and paying down our credit lines to lower our interest expense. We were able to increase our EBIT by keeping our costs steady as we increased our revenue. Paying down on the credit line helped our income grow steadily over phase 3. Although our pre-tax income did increase, the lack of interest owed allowed SNC to keep more of their money at a time where they were making the most. At the end of 2021,our sales were $18,559, which is $8,559 more than when we began this process. Net income has more than doubled.
SNC’s overall strategy of market penetration and being paid quicker turned out to be very successful for a company who could not make payroll at one point. We have become a global leader in our relatively new field and we took advantage of all opportunities to grow. We became less reliant on credit and increased our net worth. The overall result is shareholder happiness and poising our company to be around for a long time.