SELECTION CRITERIA:
In selecting what option to select the team came up with the following criteria: 1.) Selected option should lead to a reduction in working capital requirement and reduce short term debt in the process. 2.) Selected option should reduce the Cash Conversion Cycle. 3.) Selected option should free up locked capital in receivables and inventories. 4.) Selected option should lead to a zero working capital policy in the long run. SELECTED OPTIONS:

We decided to tighten accounts receivable and drop poorly selling products because they yielded a percentage decrease in working capital requirement larger than their percentage drop in sales. Also these 2 options fit all the selection criteria we stated above.

The initial selection criteria for the first phase was to manage the thin margins of SNC that seemed like the biggest limitation towards growth. The selected option, therefore, should lead to an overall reduction in the working capital requirement while reducing the short term debt in the process. Additionally, the cash conversion cycle had to be reduced in order to better manage cash that gets tied up in inventories. Freeing up locked capital in receivables and inventories became a big priority for my strategy moving ahead. Given the four options, the best ones suited to my initial goals for the company were options 2, 3, & 4. Tightening accounts receivable would lead to a decrease in sales but improve the DSO (days sales outstanding) significantly. This was congruous with the goal of improving the accounts receivable position of the company to free up cash. Secondly, dropping poorly performing products was another method of managing SNC’s working capital and freeing up cash tied in inventory. While sales and EBIT decreased by $2mil and $65,000 respectively, DSI would be lowered to a much more desirable 86 days. Despite these measures yielding a percentage decrease in working capital requirement larger than their percentage drop in sales, SNC needed some form of top-line growth to offset the decrease. Due to this, I decided to leverage supplier discounts. Sales were to increase by $2mil and accounts payable decreases by $153,000 if the payment is made within 30 days as part of the terms of sale. The drain on cash flow was, therefore, effectively managed by the increase in EBIT and some top-line growth. The options chosen led to a drop in working capital requirement, and a drop from 159 days to 137 days in the cash conversion cycle. This also improved SNC’s debt position, keeping the line of credit well under the limit and essentially reducing the need to borrow more. Overall the expectations of reducing working capital requirement and freeing up additional capital was met and there was value of $721,000 created. EBIT reduction was also minimized overall, as there was only a moderate 4.3% fall. This can be attributed to the leveraging on supplier discounts option. The surprising aspect was that in the long run SNC actually improved Net Income by 2015 along with the working capital requirements of the company.

According to the learnings and outcome of phase 1 the following selection criteria had to focus on yielding a percentage increase in sales with a relatively small percentage increase in working capital requirement. The goal for this phase was to effectively implement a growth strategy that does not strain working capital too much and can help improve the margins of SNC. This criteria made me opt for the development of a private-label product, where sales would grow somewhat slowly at 5%, 4%, and 3% when compared to the other options. However, this option would improve the company’s margin by 2%. Accompanying this improvement would be a modest increase in accounts receivable and inventory balances. According to my criteria, a smaller percentage increase was acceptable, and this option most accurately fit the selection objectives. As a result, SNC saw favorable revenue growth and a much better EBIT margin. My only reservation with running the simulation again would be to try and implement a different option in phase 2. More specifically, expanding SNC’s online presence. Due to the nature of online business, this option would have essentially allowed me to increase sales with little to no effect on working capital, making it an ideal choice. This phase added $627,000 to the value of the firm.

Finally, the last phase had to be focused around long term profitability and a comfortable/manageable proportion of working capital requirement. Choosing to adopt a global expansion plan allowed me to increase SNC’s sales and see steady growth in its top-line with only a modest increase in the amount of cash tied up in inventory. However, to effectively manage working capital for the foreseeable future, there had to be an offsetting agent/decision. I decided to renegotiate payment terms with suppliers, in order to take advantage of the discounts offered. Not only did this result in a significantly lower accounts payable balance, but it also improved the margin.