Fin571 Working Capital Simulation Wk6 434n1p

Running head: WORKING CAPITAL SIMULATION: MANAGING GROWTH

Working Capital Simulation: Managing Growth Assignment Dina Rodriguez FIN/571 May 25, 2015 William Stokes

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Working Capital Simulation: Managing Growth Assignment Introduction In this Managing Growth Assignment, I am role playing the part of CEO of Sunflower Nutraceuticals Company (SNC). SNC is 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) I must make some important decisions that will help SNC increase their working capital and maximize their overall organizational growth potential. This will take place in three phases over the course of ten years. Although SNC has had some great potential to grow, they have been struggling to break even. “Several times during the past few years, the company struggled to finance the payroll, given the firm's constrained cash position, and more than once the company's line of credit was overdrawn.” (Harvard Business School Publishing, 2014) Phase 1 (Years 2013-2015) During Phase 1, SNC was presented with four major opportunities which could be helpful for the company to maximize their growth. Those opportunities include: acquiring a new client, tightening s receivable, leveraging a supplier discount and discontinuing poorly selling products. Selecting the right options to introduce to the company could help SNC significantly raise its capital and help the company grow. First, SNC acquired a new client by adding the services of health food giant Atlantic Wellness to their nutraceutical products line. This decision significantly increased SNC’s sales, but the extra sales come with the sacrifice and increase of inventory and s receivable. Sacrificing

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inventory and s receivable is not a good deal for SNC because of their current cash position as SNC must keep a minimum of $300,000 on hand to meet their company’s operational needs. On the up side, SNC’s second decision to go with tightening up the s receivables department helped them improve dramatically by freeing up cash. By dropping Super Sports Centers, SNC lost 20% of their sales figures but improved in their DSO numbers by approximately 110 days. The third decision that SNC took during Phase 1 to help improve their sales was to take advantage of a supplier discount offered by Nutrilife. This allowed for top line growth through more sales and although their s receivables and inventories went up, these numbers were offset by the contract with Ayurveda Naturals that helped increase their EBIT numbers. The last decision made during Phase 1 was to discontinue the SNC products that sold poorly. With over 100 products being produced and sold by SNC, the inventory counts were quite high. By discontinuing some of the less popularly products, SNC was able to lower its inventory levels. Phase 2 (Years 2016-2018) During Phase 2, SNC was presented with three different opportunities including: pursuing big box distribution, developing a private label product and expanding its online presence. At this phase, SNC has already increased its sales and lowered some of its inventory levels and s receivables issues. The goal during this phase is to help SNC continue its growth at a steady pace. As SNC’s CEO, my first decision was to approve a growth opportunity through MegaMart Inc. By pursuing this type of big box distribution, our overall top line numbers will grow significantly by approximately $2,000 over the course of the 3 years. It will negatively affect

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SNC’s EBIT, but the plan is to counteract that by developing a private label product for Fountain of Youth Spas. The second decision to take this company on and make their products will help the company’s free cash flow level off and finally get into the positive by 2018. Revenues and EBIT will increase impressively and will only affect inventory and s receivables minimally. The last decision during this phase will be to help increase SNC’s online presence by partnering with Golden Years Nutraceuticals. This expansion to our online presence will help SNC reach a much larger and diverse consumer base. Over the three years in this phase, sales will increase by 10%, 5% and 3% respectively and s receivables will decrease by 7 days. Phase 3 (Years 2019-2021) During Phase 3, there were three opportunities for SNC to consider that included: adopting a global expansion plan, renegotiating current supplier credit and acquiring a high risk client. The goal during this phase is to continue the growth of SNC without acquiring any volatile risks. The first thing SNC wants to do is create a relationship with its new Latin American client, Viva Familia, which will help expand the company into Central and South America. By adopting this global expansion through Viva Familia, SNC has increased their sales by 2% and decreased their DSO by a couple of days. The second part of this phase is to renegotiate with current suppliers to be more favorable for SNC. Dynasty Enterprises offered SNC profitable of 2/10 with a net of 30. This will allow for SNC to save on costs of supplies and free up more cash. SNC has decided not to take on the high risk potential client, Midwest Miracles. Although this client would help potentially increase sales significantly by 2019, SNC is not ready to risk them going bankrupt and having a less than desirable recovery rate of 50%.

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Also, this client would likely increase SNC’s DSO by 190 due to the fact that they have a longer than average invoice pay period. This would increase SNC’s DSO and would return the company back to the same position it was in originally when it had Super Sports Center as a client. SNC has decided to decline the offer from Midwest Miracles. SNC’s Final Metrics Results Final Metric Results (Figures Reflect 2013-2021) Estimated values: 

EBIT (264% Increase): Figure went from $882 to $2,332

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Sales (188% Increase): Figure went from $13,000 to $24,483

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Net Income (318% Increase): Figure went from $393 to $1,251

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Free Cash Flow (399% Increase):

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Total Firm Value (173% Increase):

Figure went from $850 to $3,395 Figure went from $6,660 to $11,535

General Effects of Limited Access to Financing There are several general effects that limited access to financing can have on entrepreneurs trying to start or grow their own businesses. For example, limited access to financing can lead to higher interest rates on business loans and/or credit fees. It can also affect a business by having to face complicated and expensive entry (registration costs, policies, equipment fees, etc.) and exit procedures (Parrino, Kidwell & Bates, 2012). It may also limit the amount of growth (profits, SME, consumer/client base, etc.) a company has in a new market.

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Finally, it may also be more challenging (longer and more expensive process) to implement property and intellectual rights of privately owned and developed brand products. Conclusion In conclusion, the SNC simulation reflected all the different challenging ways of handling and managing growth and capital of an organization. It helped in showing all the different possible options a company needs to weigh in order to make the right decision for the future of their company. There are many challenges to running a company and I believe that through this simulation, I was able to better understand how each of these challenges affects and challenges the future both positively and negatively.

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References Harvard Business School Publishing, 2014. Working capital simulation: managing growth. Retrieved from: https://forio.com/simulate/harvard/working-capitalgrowth/simulation/?#page=getting_started Parrino, R., Kidwell, D.S., & Bates, T.W., 2012. Fundamentals of Corporate Finance (2nd ed.). Retrieved from: http://edugen.wiley.com/edugen/student/main.uni