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Working Capital Simulation: Managing Growth at Sunflower Nutraceuticals
Sunflower Nutraceuticals (SNC) offers consumers the opportunity to purchase various
amounts of dietary supplements through their internet-based store and catalog. SNC refers to
their stock as stock keeping units (SKUs), which are offered from more than 50 third-party
brands. Sunflower Nutraceuticals also has developed some private label brands including a
women's sports drink and a vitamin line for teenage girls. SNC is currently breaking even and
has seen a flat annual sales rate of $10 million annually, is working capital intensive, and has
very thin margins. Further, SNC has minimal cash on hand with a required cash level of
$300,000 and a line of credit with a limit of $3.2 million and a LIBOR of one year with an
interest rate of 8%. In order to evaluate cost of capital, SNC uses a rate of 12% to evaluate any
potential investment opportunities (Harvard Business Publishing, 2014).
The nutraceuticals market is relatively new compared to the vitamin market, though very
lucrative and is seeing growth every year. Nutraceuticals are fortified dietary supplements that
focus on utilizing specific proteins and herbs to promote health and wellness. Currently, the
industry is worth $128.6 billion and is expected to grow to $180.1 billion by 2017 via a 4.9%
compound annual growth rate (Harvard Business Publishing, 2014). This growth rate is due to
many factors including an increasing elderly population, higher health awareness and
conscientiousness, and an increasing chronic disease rate (Shirwaikar, Parmar, & Khan, 2011).
Sunflower Nutraceuticals, if provided with the right investment and cost of capital
opportunities, can take full advantage of its market growth and flourish. Currently, SNC's
financial statements, though not terrible, have definite room for improvement. Their steady sales
amount of $10 million over a three year period could be increased as well as a larger cash
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availability for emergencies, followed by a more efficient cash conversion cycle. As of 2010,
SNC has an equity value of $704 million and a total firm value of $3,248 million. The company's
EBIT, Net Income, and Annual Free Cash Flow as of 2010 are provided in graph format.
Put the graphs
From 2012 through to 2021, SNC had the opportunity to select projects that could affect
their working capital significantly broken down into three phases. Phase I comprised of the years
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2013 through 2015, Phase II comprised of 2016 to 2018, and Phase III comprised of years 2019
to 2021, with each phase offering different decisions SNC could choose in order to improve their
financial standing.
During Phase I, three important decisions were made that ultimately increased sales,
EBIT, and net income. However, cash flows were negatively affected with cash shortfalls in both
2013 and 2014.
First Decision
- Leverage a supplier discount by selling SNC's herbal nutraceutical line to Nutrilife and
negotiating a discount with Ayurveda Naturals.
Outcome:
This decision increased sales revenues by $2 million and EBIT $167 million annually, though a
cash shortfall of -$804 million was seen in 2013. Overall, the drain on cash flows was offset by
the increase in EBIT.
Second Decision:
- Drop Poorly Selling products
Outcome:
Reducing number of SKU had negative impact on sales volume, the amount of cash tied up in
inventory decreased significantly
Third Decision:
The third decision made in Phase I was to tighten SNC's accounts receivable by dropping
Super Sports Centers as a customer due to their slow payback.
Outcome:
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This decreased sales revenues by -$ million and EBIT by - million annually, but saw a positive
cash flow of million in 2013. This improvement in accounts receivable was well worth the loss
in sales revenues and EBIT. At the end of Phase I, the total value created was $ million.
Phase II
First decision
- Pursue big box distribution
Outcome:
Second decision
- SNC's online presence in online retail sales
- This decision changed the company's working capital. Sales, EBIT, and net income all
increased each year, and there were no cash shortfalls overall. The decision made during Phase II
was to expand.
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