WORKING CAPITAL

SIMULATION:
MANAGING
GROWTH

SUBMITTED BY:
Sharath Shanker

14S737

Jagannath Akella

14905

CASE OVERVIEW
Sunflower Nutraceuticals (SNC), is a privately held nutraceuticals a wide
distributor which provides all the vital dietary supplements such as herbs for
womens, vitamins, and minerals for all the consumers (mainly womens),
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 SKUs 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 companys 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 SNCs 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 SNCs 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 capital
requirements will also reduce.
Option 4: Drop poorly selling products
A lot of cash is locked up in the inventories since SNC is holding a large number
of SKUs. Therefore by dropping the poor selling products, SNC can free some of
the cash that has been locked up. This will reduce the working capital
requirements with a relatively smaller impact on the revenues.

DECISION
Our decision is to select option 2 & option 4. Dropping poorly selling products will
reduce revenues by 10% but it will be offset because of the new contract with
Nutrilife. The company will have more working capital requirement because of
the increase in sales which will be balanced by releasing the working capital that
was locked up in the inventory of poorly selling products.

RESULT
The value of the company increased by $ 168 at the end of the first phase. SNC
had positive cash flows at the end of 2015

PHASE II
In the second phase, we had three opportunities to further increase the value of
the firm
Option 1: Pursue Big Box Distribution
In this option SNC would partner with Mega mart. This deal will provide a sales
growth of 25% in 2016, 10% in 2017 & 5% in 2018, and more importantly there
wont be any growth post 2018. However, Mega Mart has huge purchasing power
to negotiate lower prices. SNC which already operates on thin margins will see a
further drop in margins. The working capital requirements will increase and since
company works on lower margins, there will be more reliance on external credit
which increase interest payments. The profit margins will see a drop by 1%. The
cash flow will be better because Megamart pays its invoices very promptly. The
negative aspect to this deal is that growth in sales is flat after 2018 and the
company will have to continue operating on lower margins.
Option 2: Expand Online presence
By pursuing this opportunity, SNC will partner with an online distributor which
will increase its revenues by 10% in 2016, 5% in 2017 & 3% in 2018. The days
sales outstanding (DSO) will be lower because the online collection is very quick.
This would also reduce the dependence on external credit for working capital and
hence the cash flow will improve. The working capital requirements will also
reduce as the cash is not locked in receivables or inventory.
Option 3: Develop a private label product
By choosing this option, SNC intend to develop a private label product for a spa
chain. This deal would increase sales by 5% in 2016, 4% in 2017 and 3% in 2018.
The overall margins will increase by 2% which is great but the problem with this
would be that the DSI (Days sales of Inventory) and DSO (Days sales
outstanding) would increase.

DECISION
We decided to reject the partnership with mega mart because though the deal
will increase sales, since the net profit margins are lower, the net effect is less.
Secondly the working capital requirements will rise along with the growth in
sales. Since nothing is given about change in credit limit, we assume it to remain
unchanged and the company would see a shortfall in cash. We decide to go for
option 2 because in expanding online presence there is a modest growth which
the company will be able to manage and the reduction in DSO improves the cash

flow of the company. We also choose to accept the third option because it also
offers a modest growth which the company can handle, the profit margins are
higher which makes this deal very attractive. We believe the increase in DSI &
DSO will be offset by the lower DSO gained through online sales.
RESULT
The value of the firm increased by $ 924.

PHASE III
In the phase 3, we had further 3 more options to choose so as to improve their
financial situation:
Option 1: Acquire a high risk client
By acquiring Midwest miracles SNC will have a sales growth of 30% in 2019 but
the downside of this deal is the risk associated with this client which is that the
client is heavily debt laden and near bankruptcy. The clients suppliers only have
a 50% chance of recovering their dues and the payment period will also be very
huge. SNC will require more working capital to support this growth and because
of all these issues this deal is likely to incur losses.
Option 2: Renegotiate current supplier terms
Here, SNC is trying to renegotiate payment terms with its main supplier which is,
Dynasty Enterprises. After negotiations the cost of sales of SNC would fall by $
200,000. This will improve the profit margins and the Account payables would
also be reduced. This means that they will require less working capital.
Option 3: Adopt a Global Expansion Strategy
In this option, SNC will acquire a new Latin America client (Viva Familia), which
helps SNC to expand their business operations into Latin America. SNCs
partnership with Viva Familia will allow SNC to decrease their DSO for a couple of
days as Viva Familia will cover delivery charges. However, this new partnership
will increase the companys DSI by two days, and it also increases SNCs sales by
2% with margins remaining same.

DECISION
Our decision is not to take the high risk client as the risk involved is very high
and SNC is not in a comfortable position to take such high risks. Apart from this,
if losses were to incur from this deal SNC would also be debt laden as it will not
be able to pay back the credit. We choose to go with the second option and
negotiate with the supplier. Due to this the cost of sales will come down and
therefore the profitability of operations increases. We also decided to go with the
third option, as the global expansion will increase the revenues of the SNC. Since
the reduction in cost of sales offsets any increase in working capital

requirements that arise due to increase in DSI, the increase in DSI is expected
not to impact SNC much.

RESULT
The firms value increased by $ 289. The decisions taken in this phase benefitted
the firm as there is an increase in the value of the firm.

CONCLUSION:
At the end of the 3rd phase the total value of the firm was at $4629. Each
decision taken during each phase was based on the concept of avoiding risky
deals. The reason was that SNC was operating on thin profit margins and had
been approaching the limit of the existing credit line. For such firm, we believe
the focus should be more on profitability rather than on increasing revenues. Had
the decision been to grow aggressively, SNC would not have been able to meet
its working capital requirements. So while making decision, we choose only those
deals that gave the company a modest growth, reduce working capital
requirements, improve profitability and better cash flow. The screen shot of the
final result is shown below.