Managing Growth

Topics: Corporate finance, Cash flow, Investment Pages: 11 (1447 words) Published: August 11, 2015


Working Capital Simulation: Managing Growth Assignment
Gwen Pritchard
FIN/571 – Corporate Finance
July 28, 2015
Elmer Lewis
Capital Simulation: Managing Growth Assignment
In the University of Phoenix (2013) simulation, Harvard Business School set up a small business Sunflower Nutraceuticals (SNC) to assist with managing growth through capital budgeting. Capital budgeting involves short and long-term financial decisions. Financing decisions establishes how a business will raise money to pay their investments and include both debt and equity (Parrino, Kidwell, and Bates, 2012). Despite recent expansion at SNC, the business faces stagnant revenue growth over the past three years from 2010 to 2012. Therefore, CEO Teresita Alvarez presented the Board of Directors several working capital financing options to increase revenue. The options are to continue to build relationship capital with their existing lender Miami Dade Merchant Bank (MDM) or pursue a nontraditional source of working capital. Working capital measures a business’s liquidity. According to Weber, Anderson, Hamm, Knispel, Liese, and Salfeld (2013), when financing is limited, reevaluating liquidity is necessary. Consequently, Alvarez’s proposal covers ten years, and the plan is to implement decisions in three phases. The first phase optimizes internal opportunities, and phases two and three optimize external growth opportunities. Currently, SNC has a $3.2 million line of credit at eight percent interest and annual cash flow reaching $500,000 annually, with MDM. Arguably, MDM is not flexible with increasing SNC’s line of credit and is not confident about how SNC is managing their finances. In other words, they are not willing to renegotiate these terms. Financial institutions directly influence a firm’s growth (Rahaman, 2011). For this reason, this paper will focus on the alternative options CEO Teresita Alvarez presented. After reading this analysis, the reader should understand the decisions made and the financial impact the decisions had on SNC growth. (University of Phoenix, 2015). Background

Historically, SNC started in 2006 as a health supplement distributor and quickly expanded by adding more products, stock keeping units (SKUs), online ordering, third party brands, and retailing. Moreover, the company added a new product line to include electrolyte sports drink, marketed towards women. However, the new product line is available for everyone to order. Since the simulation provides financial statements starting in the year 2010, one can assume that as the business expanded their products that revenue increased as well. However, from 2010-2012 sales remain at $10,000 annually, year after year, the equity value was $704,000 and total value $3.2 million. Fernando Flores

Traditionally, businesses favor banks as the primary source of borrowing capital. However, studies estimated that nontraditional lenders hold 18 to 20%, of non-real estate debt (Sherrick, Sonka, and Monke, 1994). Such is the case for local real estate investor Fernando Flores (FF). Flores investment interest came from his wife, who uses the SNC product line. FF is preparing to offer SNC their current term at $3.2 million at eight percent interest and add a $1.5 million line of credit for SNC working capital (University of Phoenix, 2013). Phase one

The decisions to make in phase one were to acquire a new customer, leverage suppliers discount, tighten accounts receivable or drop poorly selling products. The initial decision was to follow FF aggressive investment approach; therefore the only decisions accepted were to acquire a new customer and leverage suppliers discount. Although, adding more customers is the focus of a business, in this scenario there was little impact on sales, there was a one-time 40% increase. Accepting the opportunity to leverage suppliers discount did not affect the sales, however, it did lower accounts payable liability to...
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