Managing Growth
Working Capital Simulation: Managing Growth Assignment
Gwen Pritchard
FIN/571 – Corporate Finance
July 28, 2015
Elmer Lewis Capital Simulation: Managing Growth Assignment
In the University of Phoenix (2013) simulation, Harvard Business School set up a small business Sunflower Nutraceuticals (SNC) to assist with managing growth through capital budgeting. Capital budgeting involves short and long-term financial decisions. Financing decisions establishes how a business will raise money to pay their investments and include both debt and equity (Parrino, Kidwell, and Bates, 2012).
Despite recent expansion at SNC, the business faces stagnant revenue growth over the past three years from 2010 to 2012. Therefore, CEO Teresita Alvarez presented the Board of Directors several working capital financing options to increase revenue. The options are to continue to build relationship capital with their existing lender Miami Dade Merchant Bank (MDM) or pursue a nontraditional source of working capital.
Working capital measures a business’s liquidity. According to Weber, Anderson, Hamm, Knispel, Liese, and Salfeld (2013), when financing is limited, reevaluating liquidity is necessary. Consequently, Alvarez’s proposal covers ten years, and the plan is to implement decisions in three phases. The first phase optimizes internal opportunities, and phases two and three optimize external growth opportunities.
Currently, SNC has a $3.2 million line of credit at eight percent interest and annual cash flow reaching $500,000 annually, with MDM. Arguably, MDM is not flexible with increasing SNC’s line of credit and is not confident about how SNC is managing their finances. In other words, they are not willing to renegotiate these terms. Financial institutions directly influence a firm’s growth (Rahaman, 2011). For this reason, this paper will focus on the alternative options CEO Teresita Alvarez presented. After reading this analysis, the reader should understand the
Gwen Pritchard
FIN/571 – Corporate Finance
July 28, 2015
Elmer Lewis Capital Simulation: Managing Growth Assignment
In the University of Phoenix (2013) simulation, Harvard Business School set up a small business Sunflower Nutraceuticals (SNC) to assist with managing growth through capital budgeting. Capital budgeting involves short and long-term financial decisions. Financing decisions establishes how a business will raise money to pay their investments and include both debt and equity (Parrino, Kidwell, and Bates, 2012).
Despite recent expansion at SNC, the business faces stagnant revenue growth over the past three years from 2010 to 2012. Therefore, CEO Teresita Alvarez presented the Board of Directors several working capital financing options to increase revenue. The options are to continue to build relationship capital with their existing lender Miami Dade Merchant Bank (MDM) or pursue a nontraditional source of working capital.
Working capital measures a business’s liquidity. According to Weber, Anderson, Hamm, Knispel, Liese, and Salfeld (2013), when financing is limited, reevaluating liquidity is necessary. Consequently, Alvarez’s proposal covers ten years, and the plan is to implement decisions in three phases. The first phase optimizes internal opportunities, and phases two and three optimize external growth opportunities.
Currently, SNC has a $3.2 million line of credit at eight percent interest and annual cash flow reaching $500,000 annually, with MDM. Arguably, MDM is not flexible with increasing SNC’s line of credit and is not confident about how SNC is managing their finances. In other words, they are not willing to renegotiate these terms. Financial institutions directly influence a firm’s growth (Rahaman, 2011). For this reason, this paper will focus on the alternative options CEO Teresita Alvarez presented. After reading this analysis, the reader should understand the