This paper will analyze Sunflower Nutraceuticals (SNC) and the determinations their company can make to increase working capital and maximize the organization’s growth potential. Furthermore, this paper will analyze some of the determinations made in each stage of SNC’s simulation, describe how SNC’s determinations affected their working capital, and evaluate the general effects associated with limited access to funding.
Sunflower Nutraceuticals (SNC) is a privately owned nutraceuticals distributor that provides consumers, distributors, and retailers with dietary supplements such as herbs for women, vitamins, and minerals. In 2006, SNC expanded their business into several new retail stores within the nutraceuticals industry.
SNC found success by introducing their own brand of sports drinks, vitamins for teenage girls, and metabolism-boosting powders that help increase women’s metabolism. SNC has the potential to become one of the main distributors in the nutraceuticals industry.
However, SNC struggled to break even on more than one occasion, as well as exceed the company’s credit line of $3,200,000 to finance payroll and operational needs. Because of their restrictive funding options, SNC must only use a small percentage (about 12%) to evaluate and invest in new business ventures and opportunities in national and international retail markets.
SNC’s Simulation (Years 2013-2015)
During the first stage of the simulations, SNC was presented with four opportunities that could help their company maximize their growth potential. The first opportunity was to acquire a new client. The company is considering adding Atlantic Wellness, a successful health food chain. By taking on this new client, SNC will increase sales by $4 million per year and EBIT by $260,000.
However, the profit margins and net working capital terms would remain the same. The second opportunity is leveraging their supplier discount. SNC accepted the Atlantic Wellness contract to increase company sales of $4 million. SNC also accepted Ayurveda Naturals, and that contract offer is favorable to SNC as its payment terms are 2/30 with a net increase of 60.
SNC could lower its accounts payable to $153,000 if it were to pay Ayurveda Naturals within 30 days, and that payment will give them a discount of 2% on some of their raw materials.
The third chance is to fasten accounts receivable. Because Super Sports Centers history represents 20% of SNC’s gross revenue figures, those receivables take the company about 200 days to pay, which is well above the normal 90-day average.
To address this issue, SNC could drop Super Sports Centers and improve their DSO figure. However, that comes at a cost, as SNC’s revenue would drop $2 million. The last chance presented is to discontinue the company’s poorer-selling nutraceutical products.
Because SNC has more than 100 SKU merchandise in its stock, some of those products can be removed from SNC’s inventory because they are not considered everyday purchase points for most SNC consumers. Reducing or removing those items will allow SNC to reduce its DSI to 86 days, reduce its EBIT by 65k, drop sales to $1 million, and create additional room for the more popular and higher-selling inventory merchandise. Doing this will rationalize SNC’s SKU count.
SNC’s Simulation (Years 2016-2018)
During phase two of the simulation, SNC was presented with three different opportunities. The first opportunity is to pursue big-box distribution. SNC established a partnership with sales giant Mega-Mart, and that decision allowed SNC to experience an increase in sales of 25%, 10%, and 5% during 2016-2018.
In addition, this decision lowered SNC’s DSO from 6.5% to 6%; however, their bills were paid on time, causing SNC’s DSO to drop. Starting a partnership with Mega-Mart is a good idea. However, this partnership will lower margins and reduce SNC’s EBIT.
The second opportunity is to expand the company’s online presence. Because SNC wants to expand its operations into new retail markets, the company was presented with an opportunity to collaborate with Golden Years Nutraceuticals.
The purpose of the partnership is to create a larger, more diverse consumer base. From 2016-2018, this partnership reduced SNC’s DSO figures because its online sales began to be collected more quickly from seven to three to two days throughout the duration of 2016-2018.
Furthermore, SNC also saw a 10%, 5%, and 3% increase in its sales from 2016-2018. This will be an ideal opportunity for SNC as it will allow the company to increase its sales with little-to-no impact on the company’s working capital.
The third chance is to develop a private label product. SNC has a partnership with Fountain of Youth Spas, and Fountain of Youth Spas wishes SNC to develop their own private label product so that SNC can expand their nutraceutical product line, increase their sales, and consumer base.
Making this move would increase SNC’s 2016-2018 sales by 5%, 4%, and 3%. Additionally, it would also increase margins by 2% while increasing SNC’s DSO and DSI. This partnership will allow SNC to increase their EBIT while slightly raising their accounts receivable figures.
SNC’s Simulation (Years 2019-2021)
During phase three of SNC’s simulation, there were three opportunities for SNC to consider. The first opportunity is to acquire a high-risk client. Midwest Miracles is a potential bad client for SNC because of Midwest Miracles’ excessive debt and hazardous financial situation.
However, acquiring this client will increase SNC’s sales by 30% in 2019. Midwest Miracles is a possible risk for SNC as their company has a 20% chance of going bankrupt and a 50% chance of a full recovery. Other effects of this client include a likely increase in DSO by 190 days and higher fees, with a longer-than-average invoice pay period.
The second opportunity is to renegotiate supplier credit terms. SNC wants to renegotiate its credit terms with other vendors, so they used their main vendor Dynasty Enterprises (located in China) as leverage (SNC wanted a 3% discount for payment in 10 days) with other vendors.
SNC could use their negotiation tactics with other vendors because their main vendor, Dynasty Enterprise, offered SNC favorable terms of 2/10 with a net of 30. This reduces SNC’s cost of sales by $200,000 and their AR by $812,000.
The last opportunity is to follow a global expansion strategy. SNC acquired a new Latin American client (Viva Familia), which helped SNC expand their business operations into Latin America.
SNC’s partnership with Viva Familia allowed SNC to decrease their DSO by 2 days because Viva Familia will cover delivery charges. However, this new partnership increased the company’s DSI by two days, and it also increased SNC’s sales by 2% with margins remaining parallel to current business.
SNC’s Final Metrics Results
Concluding Metrics Results (Figures Reflect 2013-2021):
- EBIT (600% Increase): Figure went from $440 to $3080
- Sales (213.4% Increase): Figure went from $10,000 to $31340
- Net Income (985.90% Increase): Figure went from $156 to $1694
- Free Cash Flow (406.03% Increase): Figure went from $365 to $1847
- Total Firm Value (60.38% Increase): Figure went from $3248 to $5209
General Effects of Limited Access to Financing
There are several general effects of limited access to financing, which can have several effects on entrepreneurs seeking to start or grow their businesses. For example, limited access to funding may lead to higher interest rates on business loans, credit fees, or force a business to face a complicated and expensive entry (enrollment costs, policies, equipment fees, etc.) and exit procedures (Parrino, Kidwell, & Bates, 2012).
Furthermore, limiting the amount of growth (profits, SME, consumer/client base, etc.) a company can have in a given new market would have the same effect. Additionally, it can make it more challenging (longer and more expensive process) to implement property and intellectual rights of privately owned and developed brand products.
In summary, the SNC simulation showed us that managing growth and capital can become quite a challenge in today’s business markets, especially if a company has limited funding or takes on business partnerships they cannot financially support with their credit line or resources.
- Harvard Business Publishing. (2014). Working capital simulation: managing growth. Retrieved from http://forio.com/simulate/harvard/working-capital/simulation/?#page=dashboard.
- Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: Wiley.