Running head: WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

Working Capital Simulation: Managing Growth at Sunflower Nutraceuticals

Rachel Krebs
FIN/571
October 13, 2014
William Stokes

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

Working Capital Simulation: Managing Growth at Sunflower Nutraceuticals

Sunflower Nutraceuticals (SNC) offers consumers the opportunity to purchase various

amounts of dietary supplements through their internet-based store and catalog. SNC refers to
their stock as stock keeping units (SKUs), which are offered from more than 50 third-party
brands. Sunflower Nutraceuticals also has developed some private label brands including a
women's sports drink and a vitamin line for teenage girls. SNC is currently breaking even and
has seen a flat annual sales rate of $10 million annually, is working capital intensive, and has
very thin margins. Further, SNC has minimal cash on hand with a required cash level of
$300,000 and a line of credit with a limit of $3.2 million and a LIBOR of one year with an
interest rate of 8%. In order to evaluate cost of capital, SNC uses a rate of 12% to evaluate any
potential investment opportunities (Harvard Business Publishing, 2014).
The nutraceuticals market is relatively new compared to the vitamin market, though very
lucrative and is seeing growth every year. Nutraceuticals are fortified dietary supplements that
focus on utilizing specific proteins and herbs to promote health and wellness. Currently, the
industry is worth $128.6 billion and is expected to grow to $180.1 billion by 2017 via a 4.9%
compound annual growth rate (Harvard Business Publishing, 2014). This growth rate is due to
many factors including an increasing elderly population, higher health awareness and
conscientiousness, and an increasing chronic disease rate (Shirwaikar, Parmar, & Khan, 2011).
Sunflower Nutraceuticals, if provided with the right investment and cost of capital
opportunities, can take full advantage of its market growth and flourish. Currently, SNC's
financial statements, though not terrible, have definite room for improvement. Their steady sales
amount of $10 million over a three year period could be increased as well as a larger cash

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

availability for emergencies, followed by a more efficient cash conversion cycle. As of 2010,
SNC has an equity value of $704 million and a total firm value of $3,248 million. The company's
EBIT, Net Income, and Annual Free Cash Flow as of 2010 are provided in graph format.

Annual Free Cash Flow

(in thousands)
$600
$500
$400
$300

$510

$200
$100

$264

$292

2010

2011

$0
2012

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

Net Income
(in thousands)
$250
$200
$150
$100
$50

$236
$156
$62

$0
2010

2011

2012

EBIT
(in thousands)
$800
$600
$400
$200

$650

$440

$370

2010

2011

$0
2012

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

From 2012 through to 2021, SNC had the opportunity to select projects and/or actions
that could affect their working capital significantly broken down into three phases. Phase I
comprised of the years 2013 through 2015, Phase II comprised of 2016 to 2018, and Phase III
comprised of years 2019 to 2021, with each phase offering different decisions SNC could choose
in order to improve their financial standing.
During Phase I, three important decisions were made that ultimately increased sales,
EBIT, and net income. However, cash flows were negatively affected with cash shortfalls in both
2013 and 2014. The first decision made was to take on Atlantic Wellness as a new customer,
which resulted in an increase in sales of $4 million and an increase in EBIT of $260 million
annually from 2013 through 2015, but saw a cash shortfall of -$1, 552 million in 2013. The
increase in sales was favorable, though the decision also resulted in higher accounts receivable
and inventory balances. The second decision made was to leverage a supplier discount by selling
SNC's herbal nutraceutical line to Nutrilife and negotiating a discount with Ayurveda Naturals.
This decision increased sales revenues by $2 million and EBIT $167 million annually, though a

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

cash shortfall of -$804 million was seen in 2013. Overall, the drain on cash flows was offset by
the increase in EBIT. The third decision made in Phase I was to tighten SNC's accounts
receivable by dropping Super Sports Centers as a customer due to their slow payback. This
decreased sales revenues by -$2 million and EBIT by -$130 million annually, but saw a positive
cash flow of $1,269 million in 2013. This improvement in accounts receivable was well worth
the loss in sales revenues and EBIT. At the end of Phase I, the total value created was $358
million.
During Phase II, SNC only made one major decision that changed the company's working
capital. Sales, EBIT, and net income all increased each year, and there were no cash shortfalls
overall. The decision made during Phase II was to expand SNC's online presence in online retail
sales. Sales revenues increased by $1,400 million in 2016, $2,170 million in 2017, and $2,655
million in 2018. EBIT also increased from $95 million, to $147 million, and finally to $180
million in 2018. Though there was a cash shortfall of -$201 million in 2016 and a shortfall of $69 million in 2017, a positive cash flow of $21 million was achieved in 2018, though this had
no overall negative effect on SNC's cash flows. The total value created in Phase II was $299
million.
Two decisions were made in Phase III that led to a value creation of $292 million. Sales,
EBIT, and net income also increased overall. Further, there were no major cash shortfalls overall
during this last phase. The first decision was to renegotiate for better supplier credit terms with
Dynasty Enterprises. This significantly lowered accounts payable and improved the margin, but
had no effect on sales. EBIT increase $333 million annually from 2019 through 2021, though a
cash shortfall of -$1,045 million was seen in 2019, with two positive cash flows of $200 million
in 2020 and 2021. The last decision made among all three phases was to adopt a global

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

expansion strategy in South American with the company Viva Familia. This decision increased
SNC's top line with a very modest increase in cash tied up in inventory. The overall sales revenue
increase during this phase was $2,872 million while the overall EBIT increase was $194 million.
Though two significant cash shortfalls of -$158 and -$197 million were seen in 2019 and 2020, a
positive cash flow of $48 million was seen in 2021.
The overall effect of these decisions made during the three phases led to an increase in all
important working capital areas. Sales increased 43.95%, EBIT and free cash flows both
increased 71.43%, and net income increased 81.36%.The firm value at the end of the phases
increased to $1,653 million, and the total firm value increased to $4,197 million, which were
increases of 57.41% and 22.61% respectively.

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

EBIT
(in thousands)
$2,000
$1,500
$1,000

$1,540

$500
$440

$0

Initial

After Phases

Sales
(in thousands)
$20,000
$15,000
$10,000
$5,000

$17,841
$10,000

$0
Initial

After Phases

WORKING CAPITAL SIMULATION: MANAGING GROWTH AT

Total Firm Value

(in thousands)

Free Cash Flow

(in thousands)

$5,000

$1,000

$4,000

$800

$3,000

$600

$2,000

$4,197

$3,248

$200
$1

$0
1

$2
2

Net Income
(in thousands)
$1,000
$800
$600
$837

$400
$200
$0

$156
Initial

After Phases

Equity Value
(in thousands)
$2,000
$1,500
$1,000
$500

$1,653
$704

$0
Initial

$924

$400

$1,000

After Phases

$264

$0
Initial

After Phases

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10

References
Harvard Business Publishing. (2014). Working Capital Simulation: Managing Growth. Retrieved
from University of Phoenix, FIN571 website.
Parrino, R., Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed.).
Hoboken: John Wiley & Sons, Inc.
Shirwaikar, A., Parmar, V., & Khan, S. (2011). The changing face of nutraceuticals - an
overview. INTERNATIONAL JOURNAL OF PHARMACY & LIFE SCIENCES, 2(7), 925932. Retrieved October 13, 2014, from the EBSCOhost database.