SUNFLOWER NUTRACEUTICALS SIMULATION

REPORT
Abdul Qader Hussain

1. Executive Summary
Sunflower Nutraceuticals followed a conservative approach and worked on a
capital intensive structure. The line of credit was maxed out a few times due
to the poor cash management of the company.
The primary objective during this simulation was to improve the profit margin
while improving the cash management. A better line of credit was decided
so as to fund the growth of the company. Options were considered to tighten
the cash position of SNC. Customers who defaulted on payments were
dropped and suppliers who provided discounts on early payments were taken
advantage of.

2. Financial Standing as on December 2012

Sunflower Nutraceuticals (SNC) is operating in a $128.6 billion industry and
with a capital intensive structure with very low profit margins. The sales
growth is relatively flat with total revenues of $10 million and Net Income of
$236,000. It has a 159 days cash conversion cycle. The available line of
credit is $3,200,000. Although, SNC had a policy to maintain $300,000 as
minimum amount on hand, their line of credit was often overdrawn since the
company did not have enough operating capital to support its day to day
activities like financing the payroll. Due to this, it paid $256,000 as interest
expense. To evaluate its future investment opportunities, it uses 8% as the
cost of capital.

3. Strategy
The overall strategy was to improve the profit margin and eventually reduce
the dependence on the line of credit. But the immediate strategy after 2012
was to increase its revenues. The NWC was calculated as $4,579,000, hence

there was a need for a higher line of credit than $3,200,000. So I decided to
finance the growth using the Flores alternative which provided $4.7 million
line of credit @ 8%, but with a 20% stake in equity.
Also, the cash has to be managed in a more efficient way so as to have
enough cash on hand to support its operating activities.
The result after all these decisions was that:
1) Revenues increased to approx. $20 million
2) Net Income increased from $236,000 to $1,142,000
3) Total firm value rose to $5,226,000
4) The reliance on credit line was significantly lowered to $557,000, which
reduced the interest expenditure.
The balance sheet and income statement as on 2021 is shown in Exhibit
1.

4. Project Decisions
1. Acquire Atlantic Wellness
As part of the immediate strategy, I decided to invest in Atlantic Wellness as
it would increase revenues significantly by $4 million.
2. Leverage Supplier Discount
I decided to take advantage of the 2% discount offered by Ayurveda
Naturals, if the raw materials are paid for within 30 days. Nutrilifes herbal
product line would also increase the revenues by $2 million. Though there
was a slight increase in accounts receivables and inventory, there was a
better effect on the EBIT. And hence was a good decision.
3. Tighten Accounts Receivable
To improve the Days Sales Outstanding (DSO), I decided to drop Super Sports
Centers from the customer base. SSC took about 200 days to pay for its
orders, which was much higher than the 90-day collection period of SNC. This
would reduce the DSO which would free up cash to support its operations.

4. Drop Poorly Selling Products

By dropping the products that had a low turnover, the DSI could be improved
from 90 to 86 days. But this would also reduce the EBIT by $65,000. So I
decided not to stop these products since there was a very low reduction in
DSI which would be at a cost of lower EBIT.
5. Pursue Big Box Distribution
I decided not to go for this option since it would lower the profit margins to
6% which was opposite to my strategy, even though it would increase sales
by 25%.
6. Expand Online Presence
I considered this option over the previous one because it would not only
improve sales and reduce the DSO, but also had no effect on the profit
margin. This was in line with my strategy to improve the cash position of the
company.
7. Develop a Private Label Product
I decided to go for this proposal because it would increase the revenues and
eventually EBIT by a significant percentage. The projected increase of
approx.. $400,000 in EBIT would also improve the profit margin of SNC by
2%.
8. Renegotiate Supplier Credit Terms
By renegotiating payment terms with Dynasty Enterprises, the accounts
payable would be lowered and also improve the profit margin. Hence, this
option was considered as it was in line with the overall strategy.
9. Adopt a Global Expansion Strategy
In line with the strategy to increase revenues in order for the company to
grow, I decided to go with a new customer, Viva Famillia although it would
increase the inventory by a very small percentage.
10.

Acquire a High Risk Customer

Though this deal would increase the sales by a large percentage, it would
have a large negative impact on the accounts receivable balance. I did not

go with the risk of acquiring a new customer that had a probability of

bankruptcy, in addition to the above mentioned effects.

5. Takeaways
The major takeaway from this exercise is that there should always be a
balance between growth of the company and improvement of its cash
management. If we just focus on one of these goals, then we might end up in
a worse situation than before. It is better to have the option of a higher line
of credit if we are considering expansion options.
To consider each and every decision we must first analyze the ability of the
company to meet its cash obligations. Cash should never be left stuck up
with either the supplier or the purchaser, and should strive to keep it fast
moving.
We should avoid taking very risky decisions if the company is not stable or
just stabilizing. Go for risky options when you have a higher net income than
that required for at least 1 year of operations.
Next time, I would like to lower the cash conversion cycle. In the last phase,
my decisions led to an increase in the cash conversion cycle, but its effect
was subsided by higher profit margins.

Exhibit 1: Balance Sheet and Income Statement comparing 2012 and 2021
financials