The Executive Team of Sunflower Nutraceuticals (SNC), located in Miami Florida, has been assigned to completed a 3 phrase capital budgeting over a period of 10 years, to invest in growth and cash flow opportunities.
The Executive Team while discuss options such as taking on new consumers, supplier discounts, and reduced inventories, etc. this will allow the team to understand how the income statements, statements of cash flows are organized in order to analyze future analysis information to determine the cause and effect of each of the opportunities available to them, it will allow for optimize growth thru internal and external credit needed to balance a desire growth outcome for maintaining liquidity.
Analyze the influence of member's decisions on sales outcomes or metrics of SNC.
During the three phases of the SNC Working Capital Simulation, Learning Team A was tasked with determining which business decisions, as they relate to future actions the organization should take, will make the most positive contributions to total sales, EBIT and overall productivity. The three phases directly aligned with fiscal years 2013-2021so as to see how each decision or directive contributes to the success of SNC over time.
Phase One: 2013-2015
Acquire a New Customer: One of the most advantageous decisions in Phase One involves on Atlantic Wellness as a new customer. This action delivered a large and immediate increase to sales. The hindsight learnings from this action, however, demonstrated an increase in inventory ownership and higher accounts receivable.
Leverage Supplier Discount: In pursuance of a supplier discount, SNC was able to see an increase in EBIT (earnings before interest and taxes), which ultimately offset the increase in inventory as well and accounts receivables when taking on Atlantic Wellness as a new customer.
Tighten Accounts Receivable: To reduce the time and expenses incurred with short paying or foregoing timely payments to SNC's service providers, the company opted to drop Super Sports Centers, which was a consistently delinquent account. While this action did adversely impact sales, it did free up cash flows for other investments or business ventures.
Drop Poorly Selling Products: SNC opted to drop a number of SKU's from its product assortment during Phase One. This did have an adverse effect on sales, illustrating a decline in sales-however, this action did alleviate the inventory burden having these incremental SKU's created. The leaner the inventory, the more free or available cash flows SNC will have to grow the business.
Phase Two:2016-2018
Expand Online Presence: During the second phase of positioning SNC for success, the company opts to expand its online presence. Being a direct to consumer business, this direction made the most sense and had little-to-no impact on working capital. This action increased sales even further showing the greatest lifts in total value created during this phase of the restructuring.
Develop a Private-Label Product: In pursuing the development of a private label product, SNC increased its EBIT, however, this decision negatively impactedthe accounts receivables and inventory balances made healthier in previous actions taken.
Pursue Big-Box Distribution: After reviewing potential outcomes, it was determined the pursuit of big-box distribution would be the most advantageous for immediate and future growth. This decision demonstrated an increase in top-line growth, however, the earnings before interest and taxes (EBIT) saw a margin decrease. Given the earlier actions taken, this is a well-calculated risk,
Phase Three:2019-2021
In the third and final phase of the course correction SNC, the company opted to renegotiate supplier credit terms, adopt a global expansion strategy anddecline the acquisition of a high-risk customer. Of these actions, the adoption of a global expansion strategy had the most significant effect on top line sales growth. The renegotiation of supplier credit terms improved accounts payable balance and margin which also frees up cash flows for future growth opportunities.
Analyze the influence of member's decisions on EBIT outcomes or metrics of SNC.
Assess the influence of member's decisions on Net Income outcomes or metrics of SNC.
Analyze the influence of member's decisions on Free Cash Flow outcomes or metrics of SNC.
Assess the influence of member's decisions on Total Firm Value outcomes or metrics of SNC.
Net income approach is one variant of the capital structure theories. According to the net income approach, a firm can increase its value by decreasing its overall cost of capital which is measured in terms of Weighted average cost of capital(WACC). This is done by carrying higher debt proportion in capital which is a cheaper source when compared with equity.
According to Net Income Approach, change in the financial leverage of a firm will lead to corresponding change in the Weighted Average Cost of Capital (WACC) and also the value of the company. The Net Income Approach suggests that with the increase in leverage (proportion of debt), the WACC decreases and the value of a firm increases. On the other hand, if there is a decrease in the leverage, the WACC increases and thereby the value of the firm decreases.
The total firm value is calculated by using the following equation:
Total Firm Value = Earnings of the firm/WAC