Managing Growth

A company can understand its financial health by analyzing the financial statements. There are many tools that could be used to evaluate the financial health of a company. This paper analysis a hypothetical company called ‘Sunflower Nutraceuticals’ (SNC). Through a simulation, provided by the Phoenix website (University of Phoenix, 2015), there are three decision phases. Each of the three phases has decisions to make that affects the financial statements of the company. The paper discusses the decisions that influenced the working capital.

Historical information

SNC is a privately owned distributor of nutraceuticals. SNC started as an internet-based, direct-to-consumer distributor and retailer of dietary supplements, including vitamins, minerals, and herbs for women, with product offerings for all age groups (Harvard Business School Publishing, 2014). The company breaks even with flat annual sales growth. There is a minimum cash $300,000 that is required to meet the operational expenses. The interest rate on a credit limit of $3,200,000 is 8 percent and the cost of capital is 12 percent.

Phase 1 (2013-2015)

In this phase the company was presented with four opportunities. The goal should be to reduce the cash conversion cycle. The cash conversion cycle (CCC) is the length of time from the point at which a company actually pays for raw materials until the point at which it receives cash from the sale of finished goods made from those materials (Parrino, 2012). An investor is interested in how efficient the company manages its accounts receivable and accounts payable. CCC is a tool to analyze how long the cash is tied up in the working capital (Forbes, 2012, http://www.forbes.com/sites/ycharts/2012/03/10/the-cash-conversion-cycle/). CCC can be reduced by reducing the Days Sales in Inventory (DSI) and Days Sales Outstanding (DSO) and by increasing Days Payables Outstanding (DPO).

1. Acquiring a new client. This option was rejected. Although the sales and EBIT would have raised by acquiring a new client, the working capital and profit margin will remain the same. It will result in a higher accounts receivable and inventory balances. The cost of carrying inventory is, the cost a business incurs over a certain period of time, to hold and store its inventory (Investopedia, 2015, http://www.investopedia.com/terms/c/carryingcostofinventory.asp)

2. Leverage supplier discount. This option was accepted because it enabled growth. It increased accounts receivable and inventory balances, but it also increased EBIT. Accepting this offer will provide an opportunity to have a 2 percent discount on their raw materials and hence increase the EBIT margin.

3. Tighten Accounts Receivable. This was accepted because it helps to increase the accounts receivable. It helps the company to increase opportunity free cash flow, by reducing the DSO. Cash flow