Simulation Report
WORKING CAPITAL SIMULATION: MANAGING GROWTH
CASE OVERVIEW
Sunflower Nutraceuticals (SNC), is a privately held nutraceuticals – a wide distributor which provides all the vital dietary supplements such as herbs for women’s, vitamins, and minerals for all the consumers (mainly women’s), distributors and retailers. They are struggling to break even, with relatively flat annual sales growth and thin margins. SNC generates $ 10 million in revenues and holds a large selection of SKU’s of around 50 third party brands. They held cash reserves of $ 300,000 at all times to meet its operational needs. They have a credit line facility with a limit of $ 3,200,000 with 8% interest rate. The cost of capital for SNC is 12%.
PHASE I
In phase 1, The Company was provided with 4 opportunities to maximise their growth and to improve cash flow
Option 1: Acquire a new customer
With the acquisition of a new customer the company’s sales will increase by 40%, there is an increase in revenues by $ 4 million. However by acquiring the inventory level and the Account receivables will rise. For smooth running of the new customer SNC would require more working capital and it is already drawing near to its credit limit.
Option 2: Leveraging supplier discount
A supplier is offering SNC a very favourable payment term in which it can get a 2% discount if payment is done within 30 days. Apart from that SNC has planned to work with Nutrilife that will increase SNC’s revenues by $ 2 million. So here there are two plus points 1) The revenues of SNC will rise, 2) the discounts will bring down the COGS and the profit margins will increase.
Option 3: Tighten Accounts receivable
The average collection period being 100, one of SNC’s customers Super Sport centre is taking 200 days to pay its invoices. This customer accounts for 20% of sales, so if we drop this customer there will be a huge impact on revenue but at the same time the inventory holdings will be lowered. The working
CASE OVERVIEW
Sunflower Nutraceuticals (SNC), is a privately held nutraceuticals – a wide distributor which provides all the vital dietary supplements such as herbs for women’s, vitamins, and minerals for all the consumers (mainly women’s), distributors and retailers. They are struggling to break even, with relatively flat annual sales growth and thin margins. SNC generates $ 10 million in revenues and holds a large selection of SKU’s of around 50 third party brands. They held cash reserves of $ 300,000 at all times to meet its operational needs. They have a credit line facility with a limit of $ 3,200,000 with 8% interest rate. The cost of capital for SNC is 12%.
PHASE I
In phase 1, The Company was provided with 4 opportunities to maximise their growth and to improve cash flow
Option 1: Acquire a new customer
With the acquisition of a new customer the company’s sales will increase by 40%, there is an increase in revenues by $ 4 million. However by acquiring the inventory level and the Account receivables will rise. For smooth running of the new customer SNC would require more working capital and it is already drawing near to its credit limit.
Option 2: Leveraging supplier discount
A supplier is offering SNC a very favourable payment term in which it can get a 2% discount if payment is done within 30 days. Apart from that SNC has planned to work with Nutrilife that will increase SNC’s revenues by $ 2 million. So here there are two plus points 1) The revenues of SNC will rise, 2) the discounts will bring down the COGS and the profit margins will increase.
Option 3: Tighten Accounts receivable
The average collection period being 100, one of SNC’s customers Super Sport centre is taking 200 days to pay its invoices. This customer accounts for 20% of sales, so if we drop this customer there will be a huge impact on revenue but at the same time the inventory holdings will be lowered. The working