Overview:For this journal task, review the simulation exercise in which you will consider how the income statement, balance sheet, and statement of cash flows are interconnected; you will also consider the possible effects of each opportunity on the firm's financial position. You will then discuss your decisions and consider how this exercise can be applied to your final project.

Prompt:First, complete Step 1 (Prepare) of the HBR Working Capital Simulation for Sunflower Nutraceuticals.

The company operates on thin margins, with a constrained cash position and limited available credit. Looking at the income statement, balance sheet, and

statement of cash flows for the company after completing Step 1, address the following:

• Findings:What were the pertinent findings of your analysis? How did you arrive at your decisions, and how did you use this information to calculate working capital for the company?
• Recommendations:What recommendations would you make to improve the situation for the company? Briefly describe your recommendations.
• Application to Final Project:How can you apply your work on this simulation exercise to your final project?

Balance Sheet

(data in thousands of dollars) 2010 2011 2012

Minimum Cash Requirement $300 $300 $300

Cash & Equivalents (Shortfall)* $0 $0 $0

Accounts Receivable $3,123 $3,096 $3,014

Inventories $2,357 $2,348 $2,305

Other CA $0 $0 $0

Total Current Assets $5,781 $5,744 $5,619

Net PP&E $40 $40 $40

Other FA $0 $0 $0

Total Assets $5,821 $5,784 $5,659

Accounts Payable $1,021 $1,055 $1,050

Accrued Expenses $0 $0 $0

Total Current Liabilities $1,021 $1,055 $1,050

Amount Borrowed from Credit Line $3,332 $3,200 $2,844

Total Liabilities $4,353 $4,255 $3,894

Common Stock $200 $200 $200

Retained Earnings $1,267 $1,329 $1,565

Total Stockholder's Equity $1,467 $1,529 $1,765

Total Liabilities & Equity $5,821 $5,784 $5,659

Income Statement

(data in thousands of dollars) 2010 2011 2012

Sales $10,000 $10,000 $10,000

Cost of Sales $9,560 $9,630 $9,350

EBIT $440 $370 $650

Interest Expense $180 $267 $256

Pre-Tax Income $260 $103 $394

Income Taxes $104 $41 $157

Net Income $156 $62 $236

Cash Flow

(data in thousands of dollars) 2010 2011 2012

Net Income N/A $62 $236

Depreciation N/A $0 $0

Change in Account Receivable - $27 $82

Change in Inventories N/A $9 $43

Change in Other CA N/A $0 $0

Change in Account Payable N/A $34 -$5

Change in Accrued Expenses N/A $0 $0

Cash Flow from Operations N/A 132.61 356.35

CAPEX N/A $0 $0

Cash Flow from Investments - $0 $0

Change in Credit Line N/A -$132 -$356

Equity Issuance - $0 $0

Dividends N/A $0 $0

Cash Flow from Financing N/A -$132 -$356

Net Cash Flow N/A $0 $0

Beginning Excess Cash and Cash Equivalents N/A $0 $0

Ending Cash and Equivalents N/A $0 $0

Cash Cycle

2010 2011 2012

Accounts Receivables (days) N/A 113 110

Inventories (days) N/A 89 90

Accounts Payables (days) N/A 40 41

Cash Cycle (days) N/A 162 159

Cash Cycle (months) N/A 5 5

This is what I have so far!! I'm just so confused.

Findings: What were the pertinent findings of your analysis? How did you arrive at your decisions, and how did you use this information to calculate working capital for the company?

From reviewing Sunflower's 2010 financial statements their working capital amount is $4,760,000. That is their current assets ($5,781,000) minus their current liabilities ($1,021,000. The current ratio (current assets current liabilities) is 5.66% which shows high liquidity within the company. The bad thing about the current assets is that most of it is in Accounts Receivables, which is the amount owed to the company by customers. The current assets include the minimum cash required to have of $300,000, the Accounts receivables of $3,123,000, inventory worth $2,357,000, and cash equivalents of $0. The quick ratio of the company is 3.35%. The quick ratio is pretty much the same as the current ratio except you subtract the inventory amounts. Leaving you with lefrom the current assets before you divide it by the current liabilities.

The profit margin of the company is very tight as mentioned in the prepare section of the simulation. The profit margin of the company is very tight as mentioned in the prepare section of the simulation. The profit margin is 1.56% (Net Income Sales). Here are the rest of my findings for 2011 and 2012:

2010

2011

2012

Total Current Assets

$5,781

$5,744

$5,619

Total Current Liabilities

$1,021

$1,055

$1,050

Working Capital

$4,760

$4,689

$4,659

Current Ratio

5.66%

5.44%

5.35%

Quick Ratio

3.35%

3.22%

3.16

Profit Margin

1.56%

.62%

2.36%

Times interest earned

2.4%

1.39%

2.53%

I do notice the decrease in accounts receivables in 2011 and 2012, which shows that a change in accounts receivable as stated on its cash flow statements. There was a decrease of $27,000 and $82,000 subsequently. So, they are getting some form of payment towards their accounts receivables. I also noticed that they have maxed out their credit line with the bank and started to pay towards it in 2011 and 2012.

I also noticed that the DSO (Days sales outstanding) and DSI (Days sales in inventory) is fairly high. We would want to work on decreasing this so that we can decrease the accounts receivable account.