Working Capital Simulation: Managing Growth Assignment

Working Capital Simulation: Managing Growth Assignment

Harvard Business Publishing: Working Capital Simulation: Managing Growth Assignment Ch. 1 – 21 of fundamentals of Corporate Finance WileyPLUS Assignments All additional resources from each week

Review the following scenario:

Acting as the CEO of a small company, you will apply the principles of capital budgeting to invest in growth and cash flow improvement opportunities in three phases over 10 simulated years. Each opportunity has a unique financial profile and you must analyze the effects on working capital. Examples of opportunities include taking on new customers, capitalizing on supplier discounts, and reducing inventory.

You must understand how the income statement, balance sheet, and statement of cash flows are interconnected and be able to analyze forecasted financial information to consider possible effects of each opportunity on the firm’s financial position. The company operates on thin margins with a constrained cash position and limited available credit. You must optimize use of internal and external credit as you balance the desire for growth with the need for maintaining liquidity.

Sign-in to the simulation and review each of the following:

Welcome Statement How to Play Terminology Primer More Details (this includes information to help you understand how to play the simulation)

Write a paper of no more than 1,400 words that analyzes your decisions during each phase (1-3) and how they influenced each of the following final outcomes (metrics) of SNC:

Sales EBIT Net Income Free Cash Flow Total Firm Value

Address the following in your paper:

A summary of your decisions and why you made them How they affected SNC’s working capital What general effects are associated with limited access to financing

Include scholarly references (in addition to your course textbook and simulation materials) to support your positions.

Format your paper consistent with APA guidelines.

Click the Assignment Files tab to submit your assignment.

Sunflower Nutraceuticals (SNC) is a privately held nutraceuticals distributor based in Miami, Florida, and founded in 2006. SNC started as an internet-based, directto-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. WORKING CAPITAL SIMULATION: MANAGING GROWTH Welcome to the Working Capital Simulation Dashboard Balance Sheet Income Statement Cash Flow Cash Cycle Synopsis Loading, please wait… Download Transcript HOW TO PLAY Step 1: Prepare Read the Prepare tab to familiarize yourself with the basic background of Sunflower Nutraceuticals. Download the Terminology Primer to review key terms before beginning the simulation. Step 2: Analyze Reports The financial statements report the company’s historical and current financial picture and how the financial condition of Sunflower Nutraceuticals is changing over time. Step 3: Enter Decisions Click on the Decide tab to enter investment decisions for the next phase. You can choose to invest in or reject any or all of the opportunities available to you in that 3-year phase. When you have finished entering your investment decisions, click the Submit Decision button to advance to the next phase. Step 4: Review Results Look at the Synopsis page and your financial statements to see how each opportunity you selected impacted Sunflower Nutraceutical’s performance. Continue until you have completed all phases of the simulation. More Details Non-binding Credit Limit You will have unlimited attempt(s) to complete this scenario. Play Now

How to Play ― Working Capital Simulation: Managing Growth Video Transcript This short video will explain how to play the Working Capital Simulation: Managing Growth. You are the CEO of Sunflower Nutraceuticals. You are responsible for deciding whether to invest in a variety of growth and cash-flow improvement opportunities during three phases, spanning nine simulated years. You have access to a comprehensive set of financial statements as you make your decisions. Your task is to evaluate potential opportunities using the information provided and to select projects for each phase in the company’s life cycle using the criteria you deem most appropriate. Prepare Begin the simulation by clicking on the Prepare tab. Here you can read a summary of the simulation and review background information about the firm Sunflower Nutraceuticals, or SNC. Copyright © 2012 Harvard Business School Publishing. Page 2 You can learn more about how to play the simulation by visiting the How to Play section, which contains a high-level overview of the steps you’ll need to follow, as well as a more detailed, downloadable “How to Play” presentation. Download the Terminology Primer PDF, linked in Step 1, to review definitions for selected terms used in the simulation. After you complete the Prepare section, move onto the Analyze tab. Analyze Dashboard Begin familiarizing yourself with the dashboard. Here you will find an overview of your company’s current financial status. The timeline on the right of the screen keeps track of your progress in the simulation. You begin in Phase 1, but the simulation is pre-populated with historical data for fiscal years 2010-2012 to help you better understand the current financial condition of SNC. Graphs include Sales, EBIT, Net Income, Annual Free Cash Flow, Cumulative Free Cash Flow, Cash Surplus or Shortfall (if beyond the firm’s $300,000 minimum cash requirement), and Total Current Assets. Review the Available Credit graph to understand the firm’s available credit. Copyright © 2012 Harvard Business School Publishing. Page 3 Your firm’s Total Value is available at a glance. The Total Value Created will be updated based on decisions made in each phase. You can review the comprehensive financial statements on the other Analyze screens. Balance Sheet On the Balance Sheet screen, you can review your firm’s assets and liabilities. Graphs illustrate any change to the Cash and Cash Equivalents beyond the minimum cash requirement that SNC holds at all times, as well as Total Current Assets, and SNC’s Credit Line Utilization in the previous phase. This screen is pre-populated with historical data. As you proceed through the simulation, this screen will update based on your decisions, but you can always toggle back to review that from a previous phase. On this screen, as is the case on all financial statement screens, data can be copied to your computer’s clipboard and pasted into the spreadsheet program of your choice for further analysis. Copyright © 2012 Harvard Business School Publishing. Page 4 Income Statement The Income Statement provides further insight into the firm’s sales, earnings, and income. Graphs illustrate Sales, EBIT, and Net Income for the most recently completed phase. Copyright © 2012 Harvard Business School Publishing. Page 5 Cash Flow The Cash Flow statement shows the firm’s cash position. Graphs illustrate both the Cash Flow from Operations and Ending Cash and Equivalents, which exceed the minimum on-hand cash requirement of $300,000. Copyright © 2012 Harvard Business School Publishing. Page 6 Cash Cycle The Cash Cycle screen depicts how opportunity investments affect the firm’s cash conversion cycle. The graphic at the top of the screen updates based on opportunities selected. Copyright © 2012 Harvard Business School Publishing. Page 7 Synopsis The Synopsis page will be blank when the simulation begins, but will update based on decisions submitted on the Decide tab. Decide Once you are ready to select your projects, click on the Decide tab. In Phase 1, you’ll have 4 opportunities to evaluate. Click the name of the opportunity on the left to read a description of each proposal as well as associated financial assumptions. When you are ready, click either Accept or Decline for each project. The Opportunities Selected list will update based on your selections. When you have made all of your final selections, click “Submit Decisions” to advance to the next phase of the simulation. Do not click Submit Decisions until you have made all of the accept or decline decisions for each opportunity. You’ll be brought back to the dashboard and will see updated financial results. For more information, navigate to the Synopsis page. You can review your results and then continue to evaluate and select opportunities for 2 additional simulated phases. Copyright © 2012 Harvard Business School Publishing. Page 8 Run Archive Note that if you do not complete the simulation in one session and want to resume the run at a later time, you can do so from the “Run Archive” link at the bottom of the screen. Click on “Resume” in the pop-up window to begin where you left off. This concludes our video on how to play the simulation. Good luck!

1 TERMINOLOGY PRIMER Working Capital Simulation: Managing Growth Elements of the cash conversion cycle: DSI + DSO – DPO = cash conversion cycle  Days Sales in Inventory (DSI) = inventory $ balance / cost of goods sold Measures: how much inventory is on hand at the end of the period relative to the average cost of inventory sold during the period Example calculation: $10 million in inventory / ($35 million/365) = approximately 104 days  Days Sales Outstanding (DSO) = Accounts Receivables $ balance / sales per day Measures: how quickly a company collects on payments owed by customers Example calculation: $2 million in receivables / ($50 million/365) = approximately 15 days  Days Payables Outstanding (DPO) = Accounts Payables $ balance / purchases (COGS) per day Measures: how quickly a company pays its suppliers Example calculation: $1.5 million in payables / ($35 million/365) = approximately 16 days Working Capital Simulation: Terminology Primer 2 Elements of credit policy A firm’s credit policy generally incorporate two elements: credit period and discount terms. The credit period is the length of time buyers are given to pay for purchases. Discounts are given for early payment and usually discount terms include the discount percentage and how rapidly payment must be made for the customer to quality for the discount. For example: the credit terms 2/10, net 30 signify that the customer is eligible for a 2% discount if payment is made within 10 days, otherwise the customer must pay in full within 30 days. A line of credit is an informal agreement between a bank and a borrower indicating the maximum credit the bank will extend to the borrower. The line of credit is typically committed by the lender for no more than one year at a time.

How to Play USER GUIDE Sunflower Nutraceuticals & the Nutraceutical Industry You are the CEO of Sunflower Nutraceuticals (SNC), a privately-held Miami, Florida based nutraceuticals distributor Sunflower is essentially breaking-even with flat annual sales growth on total revenues of $10 million. The nutraceutical distribution business is working capital intensive and margins are generally thin. ◦ Sunflower Nutraceuticals started in 2006 as an Internet-based direct to consumer distributor and retailer of dietary supplements ◦ Product offering spans 100 SKUs from 50 third-party brands ◦ Experienced ambitious growth including expansion into new retail outlets and private label production The nutraceutical industry is a relatively new sector with strong growth potential ◦ In 2010, the global nutraceuticals market was worth approximately $128.6 billion. ◦ The global market is forecasted to grow at a compound annual growth rate (CAGR) of 4.9% and reach $180.1 billion by 2017. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 2 How to Play 1. Prepare – Review the Prepare tab for an introduction to the company, How to Play, and download the terminology primer. 2. Analyze reports – The financial statements report the company’s historical and current financial picture and how the financial condition of Sunflower Nutraceuticals has changed over time 3. Enter decisions – Click on the Decide tab to enter financing options (pending class settings) and investment decisions for the next phase. You can choose to invest in or reject any or all of the opportunities available to you in the 3-year phase. When you have finished entering your investment decisions, click the Submit Decision button to advance to the next phase. 4. Review – Look at the Synopsis page and your financial statements to see how each opportunity you selected impacted Sunflower Nutraceuticals’ performance. Continue until you have completed all phases of the simulation. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 3 Prepare This section gives information on your role, a company overview, and provides basic steps for How to Play. The Terminology Primer PDF downloadable from the “How to Play” introduces key concepts relevant to the simulation. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 4 ANALYZE: Dashboard Overview This page provides a visual summary of the current status of the simulation based on the most recent phase completed. The sim begins in Phase 1, with the Dashboard presenting historical data for years 2010-2012. 1. Equity Value and Total Firm Value 2. Annual Sales 3. Annual EBITDA 4. Annual Net Income 5. Annual Free Cash Flow 6. Cumulative Free Cash Flow 7. Cash Surplus/Shortfall 8. Total Value Created; and for each Phase 9. Incremental Credit Available 10. Total Value Created 11. Time Line – indicates your progress through the simulation 1 4 3 2 5 6 7 8 9 11 10 COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 5 ANALYZE: Balance Sheet The Balance Sheet depicts 3 years of data for the current phase of the simulation. As you progress through the simulation, a toggle at the top will allow you to view historical data. This screen includes three bar charts illustrating each phase’s ◦ Cash and Cash Equivalents values ◦ Total Current Assets ◦ Credit Line Availability On this screen, like most others in the simulation, you can use Copy to Clipboard functionality to paste the data into a spreadsheet program of your choice for further analysis. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 6 ANALYZE: Income Statement The Income Statement depicts 3 years of data for the current phase of the simulation. As you progress through the simulation, a toggle at the top will allow you to view historical data. This screen includes three line graphs illustrating each phase’s ◦ Sales ◦ EBITDA ◦ Net Income COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 7 ANALYZE: Cash Flow The Cash Flow Statement depicts 3 years of data for the current phase of the simulation. As you progress through the simulation, a toggle at the top will allow you to view historical data. This screen includes two bar charts illustrating each phase’s ◦ Cash Flow from Operations ◦ Ending Cash and Cash Equivalents COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 8 ANALYZE: Credit Line and Ratios The Credit Line and Ratios statement shows a table with financials for the company’s credit line statement depicting 3 years of data for the current phase of the simulation. • As you progress through the simulation, a toggle at the top will allow you to view historical data. • This screen includes a graphical illustration of the Cash Conversion Cycle that updates based on opportunities selected. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 9 DECIDE: Financing Option If your instructor assigns the Financing Options Decisions, you’ll need to review a memo from Sunflower Nutraceuticals’ Board of Directors, evaluate the three financing options, and select the best financing option for your company. NOTE: Depending on your class settings, you may not have this decision available to you. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 10 DECIDE: Decisions This is where all Decisions are entered. Each opportunity includes a detailed description and initial assumptions. You must decide to accept or decline each opportunity. COPYRIGHT © 2014 BY HARVARD BUSINESS SCHOOL PUBLISHING. 11 A green check indicates an opportunity has been selected. Accepted Opportunities are listed. Your selections will not be final until you click “Submit Decisions”.

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