Harvard Business Publishing Working Capital Simulation Manag

Harvard Business Publishing Working Capital Simulation Managing Grow

Harvard Business Publishing: Working Capital Simulation: Managing Growth Assignment Ch. 1 - 21 of Fundamentals of Corporate Finance WileyPLUS Assignments All additional resources from each week Review the following scenario: Acting as the CEO of a small company, you will apply the principles of capital budgeting to invest in growth and cash flow improvement opportunities in three phases over 10 simulated years. Each opportunity has a unique financial profile and you must analyze the effects on working capital. Examples of opportunities include taking on new customers, capitalizing on supplier discounts, and reducing inventory. You must understand how the income statement, balance sheet, and statement of cash flows are interconnected and be able to analyze forecasted financial information to consider 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. You must optimize use of internal and external credit as you balance the desire for growth with the need for maintaining liquidity. Sign-in to the simulation and review each of the following: Welcome Statement How to Play Terminology Primer More Details (this includes information to help you understand how to play the simulation) Write a paper of no more than 1,400 words that analyzes your decisions during each phase (1-3) and how they influenced each of the following final outcomes (metrics) of SNC: Sales EBIT Net Income Free Cash Flow Total Firm Value Address the following in your paper: A summary of your decisions and why you made them How they affected SNC's working capital What general effects are associated with limited access to financing Include scholarly references (in addition to your course textbook and simulation materials) to support your positions.

Paper For Above instruction

Introduction

In the competitive landscape of small businesses, strategic financial management plays a pivotal role in sustaining growth and maintaining liquidity, especially when operating under constrained cash flows and limited credit access. Acting as the CEO of a small company, the simulation provided an invaluable learning opportunity to apply core principles of capital budgeting, working capital management, and financial decision-making across three distinct phases over ten years. This paper delineates the decisions made during each phase, their rationales, and the impacts on key financial metrics and the company's overall financial health.

Decisions and Rationales in Each Phase

In the initial phase, the focus was on establishing a foundation for sustainable growth while preserving liquidity. Key decisions included cautious expansion by acquiring a select group of new customers, leveraging early payment discounts from suppliers, and optimizing inventory levels to reduce holding costs. The priority was to amplify sales without overextending working capital, as the company's thin margins necessitated precise cash flow management. These decisions were guided by thorough analysis of forecasted income statements and balance sheets, emphasizing cash inflows from sales, cash outflows from operations, and the impact on working capital.

The second phase introduced more aggressive growth strategies with targeted investments to capitalize on emerging market opportunities. These involved increasing credit sales selectively, extending trade credit terms to customers, and further negotiating supplier discounts. To fund these initiatives within limited external credit, the company optimized internal cash reserves and utilized short-term financing judiciously. The cornerstone was to balance growth acceleration with the preservation of free cash flow, ensuring sufficient liquidity to meet operational needs.

In the final phase, the focus shifted towards consolidating gains and improving operational efficiencies. Decisions involved reducing excess inventory, tightening credit policies, and strategically managing accounts receivable and payable to maximize free cash flow. This phase aimed at enhancing the firm's valuation metrics, such as total firm value and net income, while safeguarding liquidity. The rationale was to leverage accumulated operational efficiencies and maintain flexibility to adapt to market shifts, all while managing limited access to external financing sources.

Impacts on Working Capital

Throughout the simulation, decisions significantly influenced SNC's working capital—comprising current assets and current liabilities—directly affecting liquidity. In the first phase, careful credit control and inventory management stabilized working capital levels, preventing liquidity shortages. The emphasis on supplier discounts improved accounts payable, freeing cash and bolstering working capital.

In the second phase, increased sales and extended credit validity strained working capital, necessitating prudent management of receivables and payables to prevent liquidity constraints. Strategic use of short-term financing helped bridge temporary mismatches but also highlighted the importance of maintaining sufficient cash reserves.

During the final phase, efforts to reduce inventory and tighten credit policies improved working capital turnover, resulting in enhanced liquidity and shorter cash conversion cycles. Consequently, the firm was better positioned to capitalize on growth opportunities without compromising financial stability.

Effects of Limited Access to Financing

Limited external credit access posed significant challenges across all phases. It restricted the company's ability to fund aggressive growth strategies and manage sudden liquidity needs. As a result, financial decision-making centered around internal cash flow optimization and working capital efficiency. The company relied heavily on supplier discounts and inventory management to generate cash inflows, while cautious credit policies minimized the need for external borrowing.

The constraints also heightened the importance of operational efficiencies and cost control to sustain profitability and increase net income. When external credit was limited, the firm experienced a narrower margin for error, making prudent financial management essential for survival and growth. Strategic use of short-term financing, where available, served as a buffer but required careful planning to avoid liquidity crises.

Scholarly literature supports the notion that constrained access to external finance compels firms to adopt more conservative and efficiency-driven approaches (Bernanke & Gertler, 1989; Fazzari & Petersen, 1993). Such firms tend to focus on internal cash generation and working capital management as primary tools for growth and stability.

Conclusion

The simulation underscored the critical role of strategic financial management in balancing growth aspirations with liquidity constraints. Decisions centered on leveraging supplier discounts, managing inventory, extending credit judiciously, and optimizing internal cash flows proved vital. Each phase demonstrated that limited access to external financing necessitates a proactive, efficiency-driven approach—highlighting the importance of operational excellence and prudent working capital management. Ultimately, the company’s ability to adapt its financing and operational strategies directly influenced key financial metrics, including sales, net income, free cash flow, and firm valuation, emphasizing the interconnected nature of financial decision-making and business performance.

References

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Fazzari, S. M., & Petersen, B. C. (1993). Working capital and fixed investment: New evidence on financing constraints. Economics Letters, 40(4), 437-440.

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