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powerpoint.pptxManaging Growth Part 2
Nicole Hicks, David Jackson, Lucy Leslie, Woodrow Richmond, Jamin Wunderink
FIN/571
October 24, 2016
Ms. Carol Sommers
Goal - Manage Growth
Outcomes
- Sales
- EBIT
- Free Cash Flow
- Total Value Firm
The team decided to pursue Big-Box Distribution as the company to increase capital budgeting. The goal was to manage growth through positive outcomes in the areas of sales, EBIT, free cash flow, and increasing total value firm. The outcomes were acquired through several actions taken by each team member. Those actions were 1) as acquiring a new customer, 2) leveraging suppliers discount, 3) expand online presence, 4) renegotiated credit terms, 5) adopted and expansion global strategy, developed a private label product and most of all tightened accounts receivable. The overall results varied by team member because each decision was unique but consistent. The goal was to increase the firm’s value while at the same time managing growth.
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FIRM
The outcomes of the financial decisions to increase working capital while at the same time managing growth varied by team member. However, based on the working capital simulation results (slide 9) the goal of each team member was to have a positive cash flow but most of all equity and firm value. According to Hao, Jin, and Zhang (2011), investment growth taken by a profitable company enhances investor’s value. The approach taken by the each team demonstrates the potential the company has and is expected to grow. It is important for the executive team to understand that innovation is important to maintain a competitive advantage and increase both equity and firm value.
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Explain why the decisions were made (Phase 1)
Acquire a New Customer (Phase 1)
Leveraged Supplier Discount (Phase 1)
Tighten Accounts Receivable (Phase 1)
Drop poorly selling Products (Phase 1)
Team B members selected all 4 business decisions in Phase 1 except Nicole and David who did all but Tighten Accounts receivable.
By not selecting to tighten accounts receivable sales declined as a result of dropping Super Sports Centers, but the accounts receivable improved, freeing up cash flow.
We will be going over each business choice the team members could have made for SNC during the simulation. Most team members made similar decisions by selecting all options during a phase or selecting all but one option during each phase. As we go through each option you will be able to see the impact the choice has on Revenue, EBIT, and Free Cash Flow.
Lucy was the most daring and selected every option available and ultimately created a firm with the highest total firm value of $5,209 and the largest equity value of $2,665
Taking a look at the 1st Phase of decisions for SNC, each team member was given the option to choose to accept or decline the business decision
Acquire a New Customer – Taking on Atlantic Wellness as a new customer increased sales significantly but resulted in higher accounts receivable and inventory balances.
Leveraged Supplier Discount – Selling the herbal nutraceutical line to Nutrilife enabled meaningful top-line growth (Revenue and EBIT). But drained cash flow.
Tighten Accounts receivable – Revenue declined, because of dropping super Sports Centers, but accounts receivable improved freeing up cashflow.
Drop poorly selling Products – reduced the number of SKUs that SNC carried it decreased revenue, however the cashflow increased because inventory decreased.
Lucy, Woodrow, and Jamin selected all the business options for Phase 1. David and Lucy approved 3 and excluded tightening up the accounts receivable.
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Explain why the decisions were made (Phase 2)
Team B members selected all 3 business decisions in Phase 2 except David who did not select “Develop a private-label Product”.
By not selecting to Develop a private-label Product, David did not loose a large amount of free cash flow, but also did not gain a increase in sales and EBIT.
Expand online presence (Phase 2)
Develop a private-label Product (Phase 2)
Pursue Big-box Distribution (Phase 2)
Taking a look at the 2st Phase of decisions for SNC, each team member was given the option to choose to accept or decline the business decision
Pursue Big-Box Distribution – Taking on Mega-Mart Inc. Would have resulted in large top-line growth (Sales), but free cash flow would take a big hit.
Expand online presence – Expanding SNC’s online presence would increase sales but have a negative effect on free cash flow.
Develop a private-label product – Selling the private label product to Fountain of Youth Spas would increase EBIT, but slowly grow sales, and hurt free cash flow.
Lucy, Nicole, Woodrow, and Jamin selected all the business options for Phase w. David chose all but Developing a private-label product. This choice was a cash flow motivated decision.
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Explain why the decisions were made (Phase 3
Team B members selected all 3 business decisions in Phase 3 except Jamin and David who did not select the Acquire a High-Risk Customer.
By not selecting to Develop a high-risk customer Jamin and David saved on free cash flow but did not get the bump in sales and EBIT.
Acquire a High-Risk Customer (Phase 3)
Renegotiate Supplier Credit Terms (Phase 3)
Adopt Global Expansion Strategy (Phase 3)
Taking a look at the 2st Phase of decisions for SNC, each team member was given the option to choose to accept or decline the business decision
Acquire a High-Risk Customer – Taking on Midwest Miracles as a high-risk customer increased revenue (sales), but dramatically impacted the accounts receivable balance, and decreased cash flow.
Renegotiate Supplier Credit Terms – by renegotiating payments terms it improved margin and lowered accounts payable balances.
Adopt Global Expansion Strategy – Taking on Viva Familia as a new customer helped SNC grow sales & EBIT, but tied up a lot of cash in inventory so cashflow went down.
Lucy, Nicole, and Woodrow selected all the business options for Phase 2. Jamin & David chose all but taking a high-risk customer, which did not bring in any new revenue but did save on cash flow, because we find out later that the high-risk customer ( Midwest Miracles) is potentially filing Chapter 11 bankruptcy.
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Effects on Working Capital
Working Capital is a measure of the companies efficiency, liquidity, and financial health.
Positive Working Capital means the company can quickly pay off short-term debt
Negative Working Capital means the opposite for the company, unable to pay off short-term debt
Working Capital is found by calculating by Current Assets minus Current Liabilities
A factor of Working Capital is that Current Assets are those assets that can be converted into cash with in a year.
David
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Effects on Working Capital
| History | Phase 1 | Phase 2 | Phase 3 | |||||||||
| (data in thousands of dollars) | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Minimum Cash Requirement | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 | $300 |
| Cash & Equivalents (Shortfall)* | $0 | $0 | $0 | ($1,266) | ($812) | ($358) | ($1,517) | ($1,663) | ($1,422) | ($2,451) | ($1,705) | ($572) |
| Accounts Receivable | $3,123 | $3,096 | $3,014 | $4,521 | $4,521 | $4,521 | $5,632 | $6,159 | $6,501 | $6,626 | $6,820 | $6,820 |
| Inventories | $2,357 | $2,348 | $2,305 | $3,357 | $3,357 | $3,357 | $4,554 | $5,161 | $5,509 | $5,621 | $5,918 | $5,918 |
| Other CA | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| Total Current Assets | $5,781 | $5,744 | $5,619 | $6,912 | $7,365 | $7,819 | $8,970 | $9,957 | $10,888 | $10,097 | $11,333 | $12,466 |
| Net PP&E | $40 | $40 | $40 | $40 | $40 | $40 | $40 | $40 | $40 | $40 | $40 | $40 |
| Other FA | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| Total Assets | $5,821 | $5,784 | $5,659 | $6,952 | $7,405 | $7,859 | $9,010 | $9,997 | $10,928 | $10,137 | $11,373 | $12,506 |
| Accounts Payable | $1,021 | $1,055 | $1,050 | $1,516 | $1,516 | $1,516 | $2,057 | $2,331 | $2,488 | $601 | $704 | $704 |
| Acrued Expenses | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $0 |
| Total Current Liabilities | $1,021 | $1,055 | $1,050 | $1,516 | $1,516 | $1,516 | $2,057 | $2,331 | $2,488 | $601 | $704 | $704 |
| Amount Borrowed from Credit Line | $3,332 | $3,200 | $2,844 | $3,200 | $3,200 | $3,200 | $3,200 | $3,200 | $3,200 | $3,200 | $3,200 | $3,200 |
| Total Liabilities | $4,353 | $4,255 | $3,894 | $4,716 | $4,716 | $4,716 | $5,257 | $5,531 | $5,688 | $3,801 | $3,904 | $3,904 |
| Common Stock | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 | $200 |
| Retained Earnings | $1,267 | $1,329 | $1,565 | $2,036 | $2,489 | $2,943 | $3,553 | $4,267 | $5,040 | $6,135 | $7,269 | $8,402 |
| Total Stockholder's Equity | $1,467 | $1,529 | $1,765 | $2,236 | $2,689 | $3,143 | $3,753 | $4,467 | $5,240 | $6,335 | $7,469 | $8,602 |
| Total Liabilities & Equity | $5,821 | $5,784 | $5,659 | $6,952 | $7,405 | $7,859 | $9,010 | $9,997 | $10,928 | $10,137 | $11,373 | $12,506 |
(Source: University of Phoenix, 2016)
David
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Effects on Working Capital
| History | Phase 1 | Phase 2 | Phase 3 | |||||||||
| (data in thousands of dollars) | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Working Capital | $4,760 | $4,689 | $4,569 | $5,396 | $5,849 | $6,303 | $6,913 | $7,626 | $8,400 | $9,496 | $10,629 | $11,762 |
Phase 1 Decisions
Acquire a New Customer
Leverage Supplier Discount
Drop Poorly Selling Products
Phase 2 Decisions
Pursue Big-Box Distribution
Expand Online Presence
Phase 3 Decisions
Renegotiate Supplier Credit Terms
Adopt a Global Expansion Strategy
The Working Capital continued to increase year over year based on the decisions made. However, too much Working Capital can be an indication that the company is not operating as efficiently as capable of because the company could reinvest for growth and expansion. With this example, the company financials' could have been managed to reinvest more year over year.
David
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Best Option for SNC
Team B chose to go with Lucy’s results because she had the overall highest return in Total Firm Value. While her results didn't’t bring in the most in overall sales revenue her results lead to a higher return in overall capital. While Woodrow and Jamin had close results in Total Firm Value, it was determined that Lucy’s overall actions lead to a better outcome for the company.
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Lucy’s Plan Phase 1
Acquired new customers
Bringing on new customer who were investing into the company allowed for more revenue and sales to be brought into the company and higher equity
Leverage Supplier Discounts
Limiting the amount of discounts that were given out, while still keeping prices reasonable and intriguing to customers.
Tighten Accounts Receivable
Keeping a solid accounts receivable ledger where the company received their monies faster and on a more reliable rate brought in cash to the company faster, allowing for a better return rate.
Dropped poor products
Lucy saw which products were working and were being purchased on a more daily routine over other products. Cutting the products that were selling regularly and losing the company money by sitting on the shelves.
Lucy’s Plan Phase 2
Pursue-Big- Box Distribution
Expanding to offer larger box productions reduced the amount of money being spent for products and allowed the company to offer more for the prices resulting in more product being purchased.
Expand Online
Not having an online presence was hurting the company. Lucy’s plan allowed the company to expand online and now offer more products to a variety of customers both stateside and internationally resulting in higher profits and lowering costs to company.
Developed a Private-Label Product
Lucy saw the need to make the company's own product label. In doing so this showed the loyal customers how much SNC cared about its customers and showed the knowledge and commitment SNC had to their customers ion providing the best products available.
Woodrow
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Lucy’s Plan Phase 3
Acquire High-Risk Customers
Seeing a higher need in high risk customer Lucy’s plan was to engage with these customers and show them the need for the company's product. In conducting seminars and showing the customers what the results could be in purchasing our products.
Renegotiate Supplier Credit terms
Lucy saw the importance of having a good relationship with our suppliers. In doing she reached out to them and worked a new plan in which would lower costs to the company while still providing a solid and cost friendly inventory.
Global Strategy
With the online brand expanding in Lucy's plan this allowed for the company to go globally. Reaching more customers world-wide incurred more shipping costs but allowed the company's inventory to turn over much faster, raising the company's overall equity.
Woodrow
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Learning Team Decisions
| WORKING CAPITAL SIMULATION: MANAGING GROWTH TEAM B | |||||
| Results | David Jackson | Lucy Leslie | Nicole Hicks | Woodrow Richmond | Jamin Wunderink |
| Sales: | $26,245 | $31,340 | $38,573 | $24,483 | $24,483 |
| EBIT: | $2,145 | $3,080 | $3,769 | $2,332 | $2,332 |
| Net Income: | $1,133 | $1,694 | $2,108 | $1,251 | $1,251 |
| Free Cash Flow: | $1,287 | $1,847 | $2,261 | $1,399 | $1,399 |
| Equity Value: | $911 | $2,665 | $1,754 | $2,618 | $2,618 |
| Total Firm Value: | $3,455 | $5,209 | $4,298 | $5,162 | $5,162 |
| Phase 1 options chosen | Acquire a New Customer Leverage Supplier Discount Drop Poorly Selling Products | Acquire a New Customer Leverage Supplier Discount Tighten Accounts Receivable Drop Poorly Selling Products | Acquire a new Customer Leverage Supplier Discount Decline to tighten accounts revievable drop poorly selling products | Renegotiate Supplier Credit Terms Adopt a Global Expansion Strategy | Acquire a New Customer Leverage Supplier Discount Tighten Accounts Receivable Drop Poorly Selling Products |
| Phase 2 options chosen | Pursue Big-Box Distribution Expand Online Presence | Pursue Big-Box Distribution Expand Online Presence Develop a Private-Label Product | Pursue big box distribution Develp a private-label product and expand online presence | Pursue Big-Box Distribution Expand Online Presence Develop a Private-Label Product | Pursue Big-Box Distribution Expand Online Presence Develop a Private-Label Product |
| Phase 3 options chosen | Renegotiate Supplier Credit Terms Adopt a Global Expansion Strategy | Acquire a High-Risk Customer Renegotiate Supplier Credit Terms Adop a Global Expansion Strategy | Acquire a high-risk customer Renegotiate Supplier Credit terms Adopt a global expansion strategy | Acquire a New Customer Leverage Supplier Discount Tighten Accounts Receivable Drop Poorly Selling Products | Renegotiate Supplier Credit Term Adopt a Global Expansion Strategy |
(Source: University of Phoenix, 2016)
woodrow
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References
Hao, S., Jin, Q., & Zhang, G. (2011). Investment growth and the relation between equity value, earnings, and equity book value. The Accounting Review, 86(2), 605-635. Retrieved from http://search.proquest.com/docview/858021142?accountid=35812
Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate finance (11th). New York, NY: McGraw-Hill.
University of Phoenix. (2016). Working Capital Simulation: Managing Growth Part 1. Retrieved from https://forio.com/simulate/harvard/working-capital-growth/simulation
