Working Capital Simulation: Managing Growth Assignment

Working Capital Simulation

Ted Harris

FIN/571 - Corporate Finance

April 9, 2015

Robert Trujillo

Working Capital Simulation

Sunflower Nutraceuticals is a nutraceuticals distributor. Nutraceuticals include vitamins, minerals, and herbs. For the past several years the company has been expanding. With expansion SNC officials are making decisions to improve their financials, specifically, their Sales, Earnings before Interest and Taxes (EBIT), Net Income and Cash Flow. Decisions were made in three phases with each phase being three years long. This report discusses the decisions made in each decision and how it helped or hurt the financials of the company.

According to Forbes, this industry as a whole has been expanding. In 2012 revenues for this industry totaled $32 billion and should rise to $60 billion in 2021 (Forbes, 2013). The rise of interest in this industry is due to the increasing expansion of products. Products are available to all clientele.

During phase one (2013-2015) acquire a new customer, tighten accounts receivable, and drop poorly selling products were chosen by SNC’s executives. These decisions were made in order to improve the company’s cash flow and cash cycle. Since part of tightening accounts receivables resulted in a drop of Super Sports Centers, SNC decided to add Atlantic Wellness as a customer to off-set some of the negative impacts.

Adding Atlantic Wellness increased sales, but resulted higher accounts receivable and inventory balances. However, after dropping Super Sports Centers sales were reduced, but more cash were freed up. Streamlining the SKU’s had a negative impact on sales volume, but the cash in inventory was freed up.

Sales increased to $11,000,000 from $10,000,000 in previous years. $11,000,000 remained the same from 2013-2015. Earnings before Interest and Taxes (EBIT) was between $370,000 and $650,000 pre-phase one. During phase one EBIT increased to $715,000 in year 2013 and remained the same from 2014 and 2015. Net Income before phase one was $156,000 in 2010, decreased to $62,000 in 2011, and increased to $236,000 in 2012. During phase one Net Income increased to $292,000 in 2013, $314,000 in 2014, and$329,000 in 2015. Net cash flow from phase one totaled $0 for the three years. Total Value created in phase one equaled $466,000.

During phase two (2016-2018) pursuing big box distribution, expand online presence, and Develop a private label product for Fountain of Youth Spas were selected. The reasoning SNC picked all three products was to increase their sales and to continue to work on cash flow. While adding the big box distributor, Mega-Mart, as a customer helped top line growth it caused EBIT to decline. Expanding SNC’s online presence increased sales without any added negative impacts to the firm.

Sales rose from $11,000,000 in 2015 to $15,400,000 in 2016, $17,842,000 in 2017, and $19,340,000 in 2018. EBIT at the end of phase one was $715,000. In 2016 EBIT increased to $1,163,000. In 2017 EBIT increased to $1,324,000. At the end of phase two EBIT was recorded at $1,425,000. At the end of phase one Net Income amounted to $329,000. During the first year of phase two, Net Income jumped to $614,000. In 2017 Net Income had a small increase to $668,000. In 2018 Net income had increased to $727,000. Net cash flow during phase two remained at $0. The decisions made in phase two added $804,000 of value to the firm.