Sunflowers Nutraceuticals: Organizations Working Capital - Case Study Example

Working Capital Simulation: Managing Growth Assignment Introduction In the contemporary business environment, it is crucial to maintain adequate working capital for meeting the day-to-day requirements of the business in order to ensure smooth functioning of the business operations and attain steady growth and expansion. It is thus crucial to ensure effective working capital management. Nonetheless, the business strategies undertaken by the organizations might have a considerable impact on the working capital structure of organizations. It is vital that effective strategies and decisions are made so that the organizations’ goal of attaining growth and success can be attained in the most effective manner. This essay intends to analyze the decisions pertaining to growth prospects within Sunflowers Nutraceuticals (SNC) with the aim of comprehending the impact of the decisions on the organization’s working capital. The results obtained from the three phases of the simulation will be used for the analysis purpose and successively the implication of the decisions on the working capital requirements and financing decisions will be discussed in this essay. Organizational Background Sunflower Nutraceuticals, founded in the year 2006, is a privately owned nutraceuticals distributor involved in offering various types of dietary supplements to diverse customers. It offers dietary supplement such as herbs, vitamins and minerals for all age groups. SNC commenced its business operations as an internet-based, direct-to-consumer distributor and retailer of dietary supplements. Since its establishment in the year 2006, the organization has witnessed regular expansion in its business. As its expansion policy, the organization has created new retail outlets and has introduced many private-label-brands such as sports drink for women, vitamin line and metabolism boaster for teenage girls (Harvard Business Publishing, 2012). Despite the significant prospects for the expansion of the business within the industry, the organization has been struggling with the attainment of beak even level. In this regard, the organization has flat annual sales growth on total revenues of $10 million. Besides, the business of the organization is working-capital-intensive and the margins are generally low. It is worth mentioning that the organization for several times in the past has witnessed difficulties to finance the payroll, particularly due to its constrained cash position and as a result of this the organization was forced to overdraw line of credit for more than once (Harvard Business Publishing, 2012). SNC maintains a minimum level of cash on hand in order to meet its operational requirements and the needed level of cash is $300,000. The organization also uses a line of credit, with a legitimately restrictive set of governing agreements declared by a national bank. The organization uses a cost of capital of 12% for evaluating investment opportunities. In addition, significant opportunity for the organization to expand its business in the coming years has been projected. This projection based on certain factors such as increasing elderly population, growth in the rate of chronic diseases and growing consciousness towards preventive medicine (Harvard Business Publishing, 2012). Phase 1 (2013-2015) (amount in $thousands) The total sales turnover of the organization at the end of the year 2012 had been ascertained to be $100000 which would increase $120000 at the end of the first phase i.e. the year 2015 reflecting the change of $2000. Similarly, the organization’s earnings before interest, taxes, depreciation, and amortization (EBITDA) would witness a change of $167. Evidently, EBITDA at the end of the year 2012 was $650 which would grow to $817 at the end of the first phase. The net income of the organization at the end of the year 2012 was $278 which would augment to $395 at the end of the first phase. Notably, significant changes would also be seen in terms of the account receivable of the company with an increase of $603at the end of the first phase. Inventories as well as the account receivable would also see considerable changes with an increase of $452 and $151 respectively. The total value created at the end of the year 2012 was $3248 which would see an increase in value of $30 by the end of phase 1. Besides, the company is looking forward to work with Atlantic Wellness on a half size contract for its herbal nutraceutical product line with an incremental sales benefit to the top line of $2 million. Additionally, Ayurveda Naturals, an India based supplier is also offering very favorable payment terms i.e.2/30 net 60. Thus, it can be suggested that SNC can lower its account payable liability to $153 by paying Ayurveda Naturals within the 30 days thereby attaining 2% discount on raw materials. The impact of such decisions would support the growth of the organization. Contextually, selling its herbal nutraceutical line to Atlantic Wellness would significantly promote meaningful top-line growth. The growth further would increase both account receivable and inventory balances. On the contrary, the increased EBIT would counter balance the drain of cash primarily due to complimentary contract negotiated with Ayurveda Naturals. Phase 2 (2016-2018) (amount in $thousands) SNC would also see significant changes at the end of the second phase i.e. the year 2018. In this regard, the organization would witness a change of $2276 in its annual sales as compared to the preceding phase. Similarly, the changes in the cost of sales would also be ascertained with the change in the amount to $2121. Changes in EBIT would also experience an increase of $155. The account receivable of the company would also witness considerable change of $217. While on the other hand, the changes in inventories at the end of the second phase is anticipated to be $523 and the changes in the account payable is expected to be $228. The organization has its own internet-based business which is modest and effective. A leading online distributor of third-party brands, Golden Years Nutraceuticals has approached the organization. It is worth mentioning that Golden Years Nutraceuticals is much larger in terms of business operations as well as it has linkages to a national healthcare website recognized by a leading senior advocacy association. Golden Years Nutraceuticals has a large and constantly increasing customer base primarily composed of old Americans. Thus, it is suggested to SNC to expand its online presence. The expansion in its online market reach would offer it with an opportunity to acquire additional 2% sales in the year 2016 accompanied with 5% and 3% increases respectively for the year 2017 and 2018. The increase in the percentage of SNC online business however is projected to reduce the DSO as the sales occurred through online modes are delivered quickly. Nonetheless, the account receivable is anticipated to decrease by 7 days during the first year. The decrease in the account receivable is further expected to reduce by 3 days more in the year 2017 leading towards the improvement of 10 days altogether. During the year 2018, the DSO decreased by another 2 days-in effect. Thus, at the end of the second phase i.e. 2018, account payable is projected to witness a decline of 12 days as compared to the year 2016. In addition, the DSO would remain at the lower level which could result in SNC’s profit margin to remain unchanged. Phase 3 (2019-2021) Similar to the first and the second, phase, the organization could also witness decent changes in its business in the third phase. Sales cost of sales, EBIT, account receivable, inventories and account payable all would reveal significant changes at the end of the third phase i.e. the year 2021. For the third phase, global expansion strategy has been suggested as it would facilitate in increasing the sales turnover of the company. The global expansion strategy would assist SNC to grow its top line with a modest increase in cash tied up in inventory. The strategy would enable the organization to reduce its inventory and maintain adequate working capital necessary for smooth functioning of the business. Conclusion Maintaining adequate working capital as well as the effective management of the same is essential for the success of any business organization. Correspondingly, the essay aimed at analyzing decisions pertaining to growth potential within Sunflower Nutraceuticals (SNC) with the objective of comprehending the implication of the decisions on the organization’s working capital. In order to draw the impact of the decision on the organization, three phases of the simulation were identified for the purpose of carrying out the essay. From the analysis, significant changes were observed in terms of sales, cost of sales, EBIT, account receivables, inventories and account payable across the three different phases. During each phase, decisions were made and their impact on the working capital was assessed. In the first phase (2013-2015), decision to leverage supplier discount was made. The impact of this decision on the working capital of the company was ascertained to be crucial. The decision facilitated in top-line growth and increased both account receivables and inventory balance. In the second phase (2013-2018), expansion of its online presence was suggested. The impact of this decision was reflected in the form of increased online sales of the organization. Furthermore, the impact of this decision led towards declining the account payable duration to 12 days as compared to the year 2016. In the third phase, the global expansion strategy was suggested. The impact of this decision on the working capital was realized in terms of growth in its top line with modest increase in cash tied up in inventory to grow its top line. Reference Harvard Business Publishing. (2012). How to play ― working capital simulation: managing growth. Video Transcript, 1-8. Read More