Capital budgeting refers to the company’s choice of capitalizing its current finances in the most effective and efficient long-term properties with an expectation of a positive cash flow in the future. This means that the firm invests its funds in long-term assets, exchanges current funds for future benefits, and expects future benefits over a series of years. The study below is about Sunflower Nutraceuticals Company (SNC). The company faces many decisions meant to raise the working capital and cash flow of the company, which has an effect of growing the organization exponentially over the different phases.
Background of SNC Company
From the welcome note, SNC is a company based in Miami, Florida. It is a privately owned nutraceuticals firm established in 2006. It distributes dietary supplements like herbs for women, minerals, and vitamins. Since its inception, SNC has established many branches and developed private brands. The company is a capital-intensive venture operating on thin margins of profit. It has managed to break even over time, although with flat annual sales. The company was operating with an overdrawn credit position in the past few years. It was constrained financially to an extent of being unable to fund its payroll. The advantage of the company is that it has access to credit from a national bank with less restrictive terms.
Phases of SNC simulation
Stage 1 of Sunflower Nutraceuticals Company Simulation (2013-2015)
Stop the distribution of slow moving Products. SNC has over 100 range of products on sale. Dropping some of them from the supply chain will be effective since they are obsolete (Parrino, Kidwell, & Bates, 2014). Suspending these products or reducing their sale is advantageous because:
- It will provide room for storage of fast moving inventory products.
- It will reduce the days of sales inventory (DSI) to three months.
Leveraging their supplier discount – SNC is determined to add new corporate customer. Atlantic Wellness is a health food chain store and onboarding this customer will increase sales by four million dollars per year, representing an increase of 40% in sales and an increase of EBIT of $260,000. SNC also brought on board Ayurveda Naturals since it had better payment conditions that favored SNC. The terms of payment represented a net gain of 50. “The payments represent a discount of 2% on some materials if Ayurveda Naturals pays within a month” (Shapiro, 2008). This would lead to growth in net income of the firm due to increased cash flow by $16.
Acquiring new customers – “ANC sought the services of Atlantic Wellness, a health food supplier to its nutraceutical product line” (Sagner, 2010). The advantage of this is that it raised the earnings of SNC by two hundred thousand and its sales by 4 million. However, the firm value and the net income of SNC remained unchanged. The introduction of Atlantic Wellness into the nutraceutical business of SNC is advantageous as it increases the sales volume and cash flow but it comes with a cost. SNC will have to sacrifice its stock and receivables. The current cash flow position of SNC is volatile and it does not allow room for sacrificing its accounts receivable nor its inventory. If SNC sacrifices these two operational components, then there will be a violation of its policy of maintaining a cash flow of $300,000 for operational costs. Despite of this challenge, there is a fallback position for SNC since Ayurveda Natural will set in and they will negotiate a favorable deal.
Limiting the receivable accounts – The average days for debtors is 90 days. “Super Sports Centers, one of the biggest customers and invoices for 20% of offers, surpass the normal days by more than 200 days” (Shapiro, 2008).
This puts SNC in a financial crunch and the solution to this is dropping the company. The cost associated with this move is that it will reduce the sales of SNC by $2 million and on the other hand, it will improve the days of sales inventory (Sagner, 2010). The total firm value will decrease but the introduction of new customer will boost the sales that will improve the firms’ value.
Stage 2 of Sunflower Nutraceuticals Company Simulation (2016-2018)
Expansion of Sunflower Nutraceuticals Company’s online presence – Golden Years Nutraceuticals partnered with SNC to enable SNC enhance its presence in the retail market thus reaching a wide customer base. From 2016-2018, this partnership bore fruit because it decreased SNC’s daily sales outstanding (DSO) figures. This was because the sales made through the website were faster and moved within two days from the previous seven days. “Amid the same period, there was an increment in deals by 10%. This was a perfect open door for SNC as it expanded its deals without eating into its working capital” (Sagner, 2010). This improved the cash flow position of SNC and its net value.
Partnerships – SNC increased its sales by 25% after it established business partnership with Mega–Mart. This decision saw SNC’s bills paid on time, thus bringing down the daily sales inventory-waiting period. The disadvantage is that the partnership reduced the profit margins and EBIT of SNC.
Private label products – This is a strategy of product offering suggested by “Fountain of Youth Spas to enhance visibility of SNC product. This will boost its nutraceutical sales volumes by 3% to 5%” (Sagner, 2010). This will increase the EBIT and net income by 2% and improve the position of accounts receivable and total firm value.
Stage 3 of Sunflower Nutraceuticals Company Simulation (2019-2021)
Global expansion plan – SNC expanded its business operations to Latin America after the acquisition of Viva Familia. It also increased SNC’s sales volume by two percent while the profit margins were unchanged. The disadvantage of the partnership is that it increased the days of sales inventory by 2 days.
Renegotiating credit terms – SNC utilized its principle seller, Dynasty Enterprises to renegotiate its credit terms. This prompted the lessening of the expense of offers by two hundred thousand.
High-risk client – SNC partnered with a high-risk client called Midwest Miracles. The company is in debts and in a serious financial crisis. “The securing of this precarious customer is favorable, as it will increase prospective deals by 30% before the end of 2019. This precarious customer will increase the amount of day’s turnover by 190 days” (Sagner, 2010).
Sunflower Nutraceuticals Company Final Metrics Results (2013-2021)
|Measure||Figure from ($)||Figure to ($)||Percentage change (%)|
|Free Cash Flow||365||798||124|
|Total Firm Value||3,248||5,082||56|
Effects of limited access to capital
- Higher rate of interest on lending
- High market entry costs
- Firm growth is limited
- Difficulty in obtaining intellectual property rights
The paper shows the various challenges and opportunities presented when running a company through the growth stage with limited finances. The case of SNC shows that the way to grow in a financially constrained environment is through partnerships and obtaining favorable lines of credit. Running a firm and managing all the competitors is not an easy task and it requires partnership.
Parrino, R., Kidwell, D., & Bates, T. (2014). Fundamentals of Corporate Finance. New York, NY: Wiley.
Sagner, J. (2010). Essentials of Working Capital Management. New York, NY: John Wiley & Sons.
Shapiro, D. (2008). Capital Budgeting And Investment Analysis. London: Pearson Education.