Simulation on Working Capital

Simulation on working capital

     Through this simulation, I can better understand what managers and CEOs are doing when making decisions for the company. I look through each simulation; look at the impact of decisions on cash flow, sales, and EBIT. The overall effect of these decisions made during the 3 phases led to an increase in all-important working capital areas. Sales increased from $10000 to $21628, increase 116.28%.  EBIT increased from $440 million to $1930, and the free cash flow from $264 to $1158. The net income increased 558.97%, from $156 to$1028. The total firm value increased to $4756. DSO was reduced from 110-104, and only increasing DSI from 90-94.

      During phase 1, in the simulation I conducted, I chose to acquire new customers and tighten my accounts receivable. These decisions were based on improving the company’s cash flow and cash cycle. At the end of the phase 1, the total value created was $328 million.

       In my first decision, I chose to accept new customers because SNC needs exposure. This decision resulted in an increase in sales of $4 million and an increase in EBIT of $260 million annually from 2013 through 2015, but in free cash flow part, the cash shortfall -$1552 million in 2013. Then increase $156 million in 2014 and 2015.the increase in sales was because new customers brings new demands. Nevertheless, this decision also resulted in higher account receivable and inventory balance. I think this is the reason why the cash flow decrease.

      In my first simulation, I decide to decline the leverage supplier discount, although I know this decision will lower its AP if it was related to pay of Ayurveda Naturals within a month and that payment can rise a discount of almost 2% on some of their raw materials. The big company seldom taken advantage of the discounts, and need to change some technology to meet the deadline. On the other hand, this decision will also increase the accounts receivable and drain on cash flow. Because of their current cash position, SNC must keep a minimum of $3 million to meet their company’s operational needs. So higher account receivable and drain on cash flow maybe not a good idea. In my second simulation, I accept this decision, and I found increased the sales revenues by $2 million and EBIT $167million annually, but cash shortfall of -804 million in 2013. Overall, the drain on cash flow was partially offset by increased EBIT due to the favorable contract negotiated with Ayurveda Naturals.

    The third decision made in phase 1 was tighten SNC’s accounts receivable by dropping Super Sports Centers as a customer due to their slow payback. The results of tightening up the accounts receivable were that sales have declined but the receivables improved which freed up cash. This decision decreased sales revenues by $-2 million and EBIT -$130 million annually, but saw a positive cash flow of $ 1269 million in 2013. This improvement in accounts receivable not only offset the loss in sales revenues and EBIT, but also has surplus.