FIN 571 Week 6, FIN 571 Week 6 complete
Working Capital Simulation
Strategic planning in the capital budget of a business is critical for new and mature businesses. Finance professionals, internal, and external users have to be able to dissect the information provided from a company’s financial statements in order to make investment decisions. The Harvard Simulation on working capital allowed the team to manipulate different financial profiles in order to forecast operational efficiency. Working capital is calculated by subtracting current assets from current liabilities. The team’s recommendations are based in three phases for the development of the company for the next 10 years.
Phase 1 Decision
During phase one the company decided to use a controlled approach in an attempt to gain working capital. The focus is to increase growth rate and current cash flow. First, the CEO’s decided to Leverage Supplier Discount. The company leveraged the supplier discount in order to allow the company to grow and build relationships within the market matrix; however, this caused a negative impact on accounts receivable and inventory balances causing a drain on the cash flow. Secondly, we declined Acquire a New Customer. Theoretically, acquiring Atlantic Wellness as a new customer would have increased sales significantly for the first three years; however, it would result in a higher accounts receivable and inventory balances, causing the company to exceed the available credit. To offset the loss in cash flow, we Drop Poorly Selling Products and Tighten Accounts Receivables. Dropping the poorly selling products from the company simulated both a negative and a positive effect within the first three years. For example, removing the products caused the sales volumes to decrease, but it significantly freed up the amount of cash that the company had tied up in inventory. Furthermore, a constriction on the accounts receivable allowed the company to improve dramatically and improved the current assets, specifically cash, in the process. In the end the team was able to create total values of $721,000 for the company in phase one.
Phase 2 Decisions
In phase two the company expanded its online presence, developed a private-label product and declined to pursue a big box distribution for the time-being. The expansion of the online presences increased sales with very little negative impact on the working capital balance and revenues and opportunity EBIT increased year over year between 2016 and 2018 as shown below.
Expand Online Presence
By developing a private-label product the company was able to increase the EBIT margins and modestly increasing the account receivable and inventory balances. This will help the company to gain back some of the lost in cash flow during phase one due to the inventory balances, causing the revenues and opportunity EBIT increased year over year between 2016 and 2018 with a positive free cash flow after year two. In the end the company was able to create a total value for the company of $856,000 during phase two.
Learning TEAM REFLECTION
When a business is established, changes and improvements are expected and necessary in order for the business to survive. Capital improvements are costs invested to enhance a businessby adding value and increasing capital assets. In understanding the video of Betty Parks and her Alpacas, she decided to invest her retirement funds into breeding Alpacas.
The large portion of Betty’s return on capital is the birth of an alpaca. In the video she states that she has $56,000 invested and within the first year two alpacas were born, which yielded $15,000. It seems that building a stable to aid in reproduction of the alpacas would be an improvement. A stable would provide the mother a quiet place to give birth. She also needs to make sure that they are protected from potential predators but also maybe consider segregating for breeding or weaning. The mother would be secure and readily available to a veterinarian if complications would arise.
A capital improvement that could help Betty with her Alpaca business would be adding a few fences on her land. There should be aperimeter and interior fence. The perimeter fence will protect the herd from dangerous predators keeping them safe. The alpaca must remain healthy and show quality in order to receive as much as $20,000 per animal.The interior fence could be used for the segregation of the herd for specific purposes.With Betty’s two new additions to her herd it is right to assume that the number of alpacas will continue to grow. Because of this she will need to ensure that she has sufficient space to contain the herd while ensuring she keeps them contained. She also needs to make sure that they are protected from potential predators but also maybe