My question is about Working Capital Simulation from Harvard Business Publishing. We are given the financials of a company, Sunflower Nutraceuticals. Here is the description.

Sunflower

Nutraceuticals (SNC) is a privately held nutraceuticals distributor based in Miami, Florida, and founded in 2006. SNC started as an internet-based,

direct-to-consumer distributor and retailer of dietary supplements, including vitamins, minerals, and herbs for women, with product offerings for all age groups. Through its website and catalog, SNC offers customers a large selection of stock keeping units (SKUs) from more than 50 third-party brands. Since its founding, the company ambitiously expanded into new retail outlets and launched several private-label brands, including a line of women's electrolyte sports drinks, metabolism-boosting powders, and a vitamin line for teenage girls. SNC is breaking even, with relatively flat annual sales growth on total revenues of $10 million. The business is working-capital-intensive, and margins are generally thin. Several times during the past few years, the company struggled to finance the payroll, given the firm's constrained cash position, and more than once the company's line of credit was overdrawn. SNC keeps a minimum amount of cash on hand to meet operational needs and this level ofrequiredcash is $300,000. The company also accesses a line of credit, with a fairly restrictive set of governing covenants, issued by a national bank. The credit limit on the facility of $3,200,000 is priced as a spread over the 1-year LIBOR. It is currently set at a rate of 8%. SNC uses a cost of capital of 12% to evaluate investment opportunities. Health food companies have sold vitamins for decades, but the nutraceuticals industry is relatively new. Although regulatory bodies apply stricter definitions, the term nutraceuticals generally means "a fortified food or dietary supplement that provides health benefits". Examples include omega-3 fatty acids, probiotics, and soy and energy drinks. By 2010, the global nutraceuticals market was worth approximately $128.6 billion; it is forecasted to grow at a compound annual growth rate (CAGR) of 4.9% and reach $180.1 billion by 2017. The key driving factors for industry growth are the increase in the elderly population, the rate of growth in chronic diseases, the relative affluence of the working population, and increasing societal awareness of preventive medicine.

Assignment:

Acting as the CEO of Sunflower Nutraceuticals (SNC) you will be presented with 10 different investment growth/cash flow improvement opportunities during three phases over a nine-year period which you must decide to either accept or reject. Each opportunity will include a set of limited financial projections. Each opportunity has a unique financial profile that must be assessed. Your decisions will have a direct impact on various financial metrics of the firm. Each decision made will drive six key income statement and balance sheet accounts.

Balance Sheet (data in thousands of dollars) 2010 2010 2011 2012 Cash and Cash Equivalents Minimum Cash Requirement $300 $300 $300 2011 Cash & Equivalents (Shortfall)* $0 $0 $0 2012 History Accounts Receivable $3,123 $3,096 $3,014 Inventories $2,357 $2,348 $2,305 2013 Other CA $0 $0 $0 10 '1 1 12 2014 Total Current Assets $5,781 $5,744 $5,619 Total Current Assets Phase 1 8K 2015 Net PP&E $40 $40 $40 Other FA $0 $0 $0 5K 2016 Total Assets $5,821 $5,784 $5,659 3K 2017 0 Phase 2 Accounts Payable $1,021 $1,055 $1,050 10 '71 '12 2018 Accrued Expenses $0 $0 $0 Credit Line Utilization 2019 Total Current Liabilities $1,021 $1,055 $1,050 4K 2020 Amount Borrowed from Credit Line $3,332 $3,200 $2,844 2K Phase 3 Total Liabilities $4,353 $4,255 $3,894 2021 Common Stock $200 $200 $200 0 10 '71 12 2022 Retained Earnings $1,267 $1,329 $1,565 Complete Total Stockholder's Equity $1,467 $1,529 $1,765 Total Liabilities & Equity $5,821 $5,784 $5,659Cash Cycle 2010 The Cash Conversion Cycle 90 days 110 days 2011 Days Sales in Inventory (DSI) Days Sales Outstanding (DSO) History 2012 2013 41 days 159 days Days Payables Cash Conversion Cycle 2014 Outstanding (DPO) Phase 1 2015 Day 0: Receipt of Raw |Day 41: Pay for Day 200 : Collect in Materials Purchased Materials Accounts Receivable 2016 2010 2011 2012 2017 Accounts Receivables (days) 113 110 Phase 2 Inventories (days) 89 90 2018 Accounts Payables (days) 40 41 2019 Cash Cycle (days) 162 159 2020 Cash Cycle (months) 5 5 Phase 3 2021 Copy to Clipboard 2022 CompleteCash Flow 201 0 {data in thousands of dollars) 2010 2011 2012 I Cash Flow (ram Operations Net Income - $62 $235 400 20\" I E ':E Depreciation - $0 $0 2012 I 200 Change in Account Receivable - $27 $32 201 3 Change in Inventories - $9 $43 0 ' Change in Other CA - $0 $0 '0 H '2 2014 I 3.\": .: Change inAcoount Payable - $34 -$5 Ending Cash and Equivalents 2015 I 1 Change in Accrued Expenses - $0 $0 201 6 Cash Flow from Operations - 132.61 356.35 N CAPEX . $0 $0 2017 I 3.\": g D. Cash Flow from Investments - $0 $0 0 .10 m .12 201 a I Change in Credit Line - -$132 $356 201 9 Equity Issuance - $0 $0 to Dividends . $0 $0 2020 I 3.\": .c . . D. cash Flow from Financing - 6132 6356 2021 I Net Cash Flow - $0 $0 2022 Beginning Excess Cash and Cash Equivalents - $0 $0 Complete Ending Cash and Equivalents - $0 $0 Dashboard: End of 2012 (Data in thousands of dollars) Equity Value: $704 Total Value: @ $3,248 2010 Sales Annual Free Cash Flow Total Value Created dollars /year 10K $10,000 dollars /year 1K This section will be updated as you 2011 500 advance to the next phase. History 2012 10 '12 10 '11 '12 2013 EBIT Cumulative Free Cash Flow Available Credit dollars /year 1K 500 dollars /year 2K Credit Line 1K dollars /year 5K $650 2014 3k Phase 1 2015 10 11 '12 10 '11 '12 10 '11 '12 2016 Net Income Cash Surplus/ (Shortfall) Total Current Assets $278 10K dollars /year 400 dollars /year 2017 200 dollars /year 5K Phase 2 2018 '10 '11 '12 '10 '11 '12 10 '11 '12 2019 2020 Phase 3 2021 2022 CompleteIncome Statement 2010 (data in thousands of dollars) 2010 2011 2012 Sales Sales $10,000 $10,000 $10,000 15K 2011 Cost of Sales $9,560 $9,630 $9,350 History 1 0K 2012 EBIT $440 $370 $650 5K 2013 Interest Expense $180 $267 $256 0 '10 Pre-Tax Income $260 $103 $394 '11 12 2014 Income Taxes $104 $41 $157 EBIT Phase 1 1K 2015 Net Income $156 $62 $236 2016 Copy to Clipboard 500 2017 Phase 2 '10 LL, 12 2018 Net Income 2019 400 2020 200 Phase 3 2021 0 '10 '11 12 2022 CompleteDecisions Phase 1: 2013 - 2015 Acquire a New Customer SNC is considering an opportunity to add Atlantic Wellness, a large, successful health food chain as a new corporate customer for its herbal nutraceutical product line. Taking on this customer would immediately increase SNC's sales by $4 million per year (a Leverage Supplier Discount one-time increase of 40%) and EBIT by $260,000. The profit margins and net working capital terms would remain the same as for SNC's existing business. Tighten Accounts Receivable What would you like to do about this opportunity? Accept Decline Drop Poorly Selling Products 2013 2014 2015 Post 2015 Incremental Summary Income Statement ($ in thousands) Opportunities Selected Sales $4,000 $4,000 $4,000 $4,000 No opportunities selected yet. Cost of Sales $3,740 $3,740 $3,740 $3,740 EBIT $260 $260 $260 $260 Incremental Balance Sheet ($ in thousands) Accounts Receivable $1,205 $1,205 $1,205 $1,205 Inventories $922 $922 $922 $922 Submit Decisions Accounts Payable $420 $420 $420 $420 Copy to ClipboardDecisions Phase 1: 2013 - 2015 Acquire a New Customer SNC is considering working with Nutrilife on a half-size contract for its herbal nutraceutical product line, with an incremental sales benefit to the top line of $2 million (a one-time 20% increase). In addition, Ayurveda Naturals, the India-based supplier of herbs for Leverage Supplier Discount the Nutrilife contract, is offering very favorable payment terms: 2/30 net 60. In other words, SNC could lower its accounts payable liability to $153,000 by paying Ayurveda Naturals within 30 days, thereby realizing a 2% discount on raw materials. Tighten Accounts Receivable What would you like to do about this opportunity? Accept Decline Drop Poorly Selling Products 2013 2014 2015 Post 2015 Incremental Summary Income Statement ($ in thousands) Opportunities Selected Sales $2,000 $2,000 $2,000 $2,000 No opportunities selected yet. Cost of Sales $1,833 $1,833 $1,833 $1,833 EBIT $167 $167 $167 $167 Incremental Balance Sheet ($ in thousands) Accounts Receivable $603 $603 $603 $603 Inventories $452 $452 $452 $452 Submit Decisions Accounts Payable $151 $15 $151 $151 Copy to ClipboardDecisions Phase 1: 2013 - 2015 Acquire a New Customer SNC is considering evaluating the payment profile of its customer base, especially focusing on customers who are chronically delinquent in paying invoices. Super Sports Centers-a national, mall-based, upscale fitness network and a key SNC customer Leverage Supplier Discount (accounting for 20% of SNC's overall sales)-routinely takes almost 200 days to pay its invoices. That far exceeds the 90-day average collection period for SNC's other customers. If SNC drops Super Sports Centers from its customer base, sales will decrease by $2 million. However, the cash-flow measure of days sales outstanding (DSO) will quickly improve. Tighten Accounts Receivable What would you like to do about this opportunity? Drop Poorly Selling Products Accept Decline 2013 2014 2015 Post 2015 Opportunities Selected Incremental Summary Income Statement ($ in thousands) No opportunities selected yet. Sales -$2,000 -$2,000 -$2,000 $2,000 Cost of Sales -$1,870 -$1,870 $1,870 $1,870 EBIT -$130 -$130 -$130 -$130 Incremental Balance Sheet ($ in thousands) Accounts Receivable -$1,096 -$1,096 $1,096 -$1,096 Inventories -$461 -$461 -$461 $461 Submit Decisions Accounts Payable -$210 $210 -$210 -$210 Copy to ClipboardDecisions Phase 1: 2013 - 2015 Acquire a New Customer X Sunflower Nutraceuticals is planning to review the order frequency of individual products through stock-keeping units (SKUs) over the last 12 months. Although Sunflower carries over 100 different SKUs, certain types of products -such as vitamins for specific Leverage Supplier Discount life stages, less popular herbs, and other products -are not everyday purchases for most consumers, so those items take up space in the physical inventory but have a low turnover. If Sunflower eliminates these slower-moving items from the inventory, the companys sales will decrease by $1 million and EBIT will decrease by $65,000. Reducing the size of Sunflowers overall product Tighten Accounts Receivable offerings will lower the Days Sales of Inventory (DSI) to a more desirable 86 days. These changes are reflected in the assumptions provided below. Drop Poorly Selling Products What would you like to do about this opportunity? Accept Decline Opportunities Selected 2013 2014 2015 Post 2015 No opportunities selected yet. Incremental Summary Income Statement ($ in thousands) Sales -$1,000 -$1,000 -$1,000 $1,000 Cost of Sales -$935 $935 -$935 $935 EBIT -$65 -$65 -$65 -$65 Incremental Balance Sheet ($ in thousands) Submit Decisions Accounts Receivable -$301 $301 $301 $301 Inventories $323 $323 $323 $323 Accounts Payable -$105 -$105 -$105 -$105 Copy to Clipboard