Homework answers / question archive / Working Capital Simulation: Managing Growth Sunflower Nutraceuticals Sunflower Nutraceuticals (SNC) is a privately held nutraceuticals distributor based in Miami, Florida, and founded in 2006

Working Capital Simulation: Managing Growth Sunflower Nutraceuticals Sunflower Nutraceuticals (SNC) is a privately held nutraceuticals distributor based in Miami, Florida, and founded in 2006

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Working Capital Simulation: Managing Growth Sunflower Nutraceuticals 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 of required cash 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. Balance Sheet Sunflower Nutraceuticals Balance Sheet (data in thousands of dollars) 2010 2011 2012 Minimum Cash Requirement $300 $300 $300 Cash & Equivalents (Shortfall)* SO SO SO Accounts Receivable $3,123 $3,096 $3,014 Inventories $2,357 $2,348 $2,305 Other CA $0 $0 $O Total Current Assets $5,781 $5,744 $5,619 Net PP&E $40 $40 $40 Other FA So $0 $0 Total Assets $5,821 $5,784 $5,659 Accounts Payable $1,021 $1,055 $1,050 Accrued Expenses SO $0 $0 Total Current Liabilities $1,021 $1,055 $1,050 Amount Borrowed from Credit Line $3,332 $3,200 $2,844 Total Liabilities $4,353 $4,255 $3,894 Common Stock $200 $200 $200 Retained Earnings $1,267 $1,329 $1,565 Total Stockholder's Equity $1,467 $1,529 $1,765 Total Liabilities & Equity $5,821 $5,784 $5,659 Income Statement Sunflower Nutraceuticals Income Statement (data in thousands of dollars) 2010 2011 2012 Sales $10,000 $10,000 $10,000 Cost of Sales $9,560 $9,630 $9.350 EBIT $440 $370 $650 Interest Expense $180 $267 $256 Pre-Tax Income $260 $103 $394 Income Taxes $104 $41 $157 Net Income $156 $62 $236 Cash Cycle Sunflower Nutraceuticals Cash Cycle The Cash Conversion Cycle 90 days Days Sales in Inventory (SI) 110 days Days Sales Outstanding (DSO) 41 days 159 days Days Payables Outstanding (DPO) Cash Conversion Cycle Day 0: Receipt of Raw Day 41: Pay for Materials Purchased Materials Day 200: Collect in Accounts Receivable 2010 2011 2012 Accounts Receivables (days) 113 110 Inventories (days) 89 90 Accounts Payables (days) 40 41 Cash Cycle (days) 162 159 Cash Cycle (months) 5 5 Phase 3: 2019 – 2021: Acquire a High Risk Customer SNC is considering an opportunity to add a large customer, Midwest Miracles, a recently launched weight-loss center that is in a precarious financial situation because its entrepreneurial founder took on a significant debt burden. Acquiring Midwest Miracles would allow SNC to increase sales by 30% in 2019. Some analysts have forecasted a 20% probability that Midwest Miracles will declare bankruptcy, and they estimate a recovery rate for suppliers of 50%. Midwest Miracles would be willing to pay significantly higher prices for SNC's products, which can increase the EBIT margin of the whole company by almost 1%. However, Midwest Miracles is likely to take a longer-than-average time to pay its invoices. Therefore, SNC's DSO is likely to increase significantly What would you like to do about this opportunity? Accept Decline 2019 2020 2021 Incremental Summary Income Statement ($ in thousands) $3,000 $3,000 $2,708 $2,708 $2,708 $292 $292 $292 Change in Sales Change in Cost of Sales Change in EBIT $3,000 Change in Accounts Receivable Change in Inventories Change in Accounts Payable Copy to clipboard Incremental Balance Sheet ($ in thousands) $1,616 $1,616 $1,616 $668 $668 $668 $304 $304 $304