FIN571 Foundations of Corporate Finance WEEK 6 ASSIGNMENT Working Capital Simulation

Phase 1.docx

Decisions Phase 1: 2013 - 2015

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 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.

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 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.

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 (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.

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 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 offerings will lower the Days Sales of Inventory (DSI) to a more desirable 86 days. These changes are reflected in the assumptions provided below.

Phase 1: 2013 - 2015 Synopsis

You selected Acquire a New Customer, Leverage Supplier Discount, and Drop Poorly Selling Products and declined Tighten Accounts Receivable . Below is a synopsis of how each opportunity affected your Working Capital and Cash Flow.

Acquire a New Customer

Taking on Atlantic Wellness as a new customer increased sales significantly but resulted in higher accounts receivable and inventory balances.

Revenue'13'14'1503K5K

Opportunity EBIT'13'14'150200400

Opportunity Free Cash Flow'13'14'150-2K-1K1K

Leverage Supplier Discount

Selling its herbal nutraceutical line to Nutrilife enabled meaningful top-line growth. While this growth increased both the accounts receivable and inventory balances, the drain on cash flow was partially offset by increased EBIT due to the favorable contract negotiated with Ayurveda Naturals.

Revenue'13'14'1501K2K

Opportunity EBIT'13'14'150100200

Opportunity Free Cash Flow'13'14'150-1K-500500

Drop Poorly Selling Products

Although reducing the number of SKUs that SNC carries in its product offering did have a negative impact on sales volume, the amount of cash tied up in inventory decreased significantly as a result of streamlining the SKU count

Revenue'13'14'150-1K-500

Opportunity EBIT'13'14'150-100-50

Opportunity Free Cash Flow'13'14'150-250250500