FMT-2 Simulation Analysis

Rohan T M
16F351
Section 3

In this single-player simulation, students act as the CEO of a small company, Sunflower
Nutraceuticals, and decide whether to invest in growth and cash-flow improvement opportunities
in three phases over 10 simulated years. Each opportunity has a unique financial profile and
students must analyze effects on working capital. Examples of opportunities include taking on
new customers, capitalizing on supplier discounts, and reducing inventory. Students must
understand how the income statement, balance sheet, and statement of cash flows are
interconnected and consider the possible effects of each opportunity on the firm's financial
position. The company operates on thin margins with a constrained cash position and limited
available credit. Students must optimize use of "internal" and external credit as they balance the
desire for growth with the need for maintaining liquidity.

The simulation happened over three phases and each phase represented 3 years. For every phase
there were a set of decisions available to choose from, we had to choose the most suitable
choices based on the financial condition of the firm.

Phase 1:

In the previous years the sales had remained constant. The sales margin were considerably low
and the cash conversion cycle was on the higher side.

Decisions Taken:

1) Leverage supplier discounts

 Outcome: This helped reduce the cost of purchasing and thus increased the sales margin
and had a positive impact on the overall profit. But this also increased the inventories
level by a bit.
2) Acquire a new customer
Outcome: This decision helped to increase the sales by 4 million. This was achieved by
targeting a new customer base. The margins on the sales continued to be small, but the
increase in the volume of sales helped to increase the revenue.

3) Tighten account receivables

Outcome: At present SNC had a problem with high amount of receivables. This
decisions helped to speed up the receivables payment process and this helped increase the
amount of disposable cash available with SNC. This improved its financial health.

Total increase in value achieved: $358

Phase 2
Decisions Taken:

1) Develop private label product

Outcome: This decision helped to improve the overall sales by introducing a new
product with better sales margin. This helped to increase the profit and the income.
The change in the cash conversion cycle was not much overall.\

2) Pursue Big-Box Distribution

Outcome: SNC tied up with a firm which had a good distribution network present
throughout the country, this was done with an intension of increasing the sales. The
sales did increase by $25 million. But big-box distribution also had greater bargaining
power and this led to considerable increase in the total receivables and also increased
the overall cash conversion cycle, thus creating a depletion in the cash reserve of the
firm. This was not a good decision and should not have been taken.

Total increase in firm value: $658

Phase 3
Decisions Taken:
1) Renegotiate supplier credit terms
Outcome: This decision helped to reduce the outstanding payments from the side
of the supplier. This reduced the cash conversion cycle and increased the cash
reserve available with the firm. This also helped improve the margin by 1%
2) Adopt a global expansion strategy
Outcome: This was aimed at increasing the overall sales of the firm and to
increase the customer base. This decision improved the sales and the margins,
though there was a slight increase in the receivables.

Total increase in firm value: $410

Final firm value: $4703