Problem: Company needs to decide whether the production of juices in paper packages is viable from the future cash-flow perspective. The client ordered a simulator with following inputs: 

(a)  Orders

(b) Raw materials

(c)  Expenses

In order to assess future cash requirements, fictive unlimited account was introduced into the simulation. This solution also allows calculation of the capital expenses. 

Main simulation outputs should be:

(a)  Operating profit 

(b)  Cash-flow requirements

Solution: The simulator containing all above mentioned functions. 

  manažerská simulace

Figure 1 - example of the simulator user interface

Orders

There are following factors in parameter groups:

- Products structure

- Orders

- Unit costs

- Price

- Payables due

- Bad receivables dynamics

manažerská simulace

Figure 2 - User interface - orders

Raw materials

In this company, raw materials include concentrated apple and orange juice, aromatic additives and water. Package, glue, hydrogen peroxide and plastic film. Left (blue value) shows initial inventory and right (green) required level during simulation. Other factors include:

-         Delivery delay

-         Unit price

-         Payables due

manažerská simulace

Figure 3 - User interface - raw materials

 Decision panel "Expenses" contains following factors:

 - Personal expenses divided into wages and insurance

- Production costs divided into services and energy

- Interest paid for loans

The client was not interested in other factors, like:

- exchange rates dynamics

- investment and noninvestment eqity

manažerská simulace

Figure 4 - User interface - expenses

Numeric simulation output is located in the simulator main window (dynamic balance sheet, profit and loss, cash-flow), selected parameters are displayed in time graphs:

- Graph 1 – Cash-flow and profit

- Graph 2 – Accounts receivables and payables

- Graph 3 – Supplies of products

- Graph 4 – Supplies of the raw material

- Graph 5 - Interest paid

manažerská simulace

Figure 5 - User interface - time graph

The simulator helps managers in finding answers to questions that can hardly be answered by other tools.

Lets simulate following scenarios:

a)     scenario description

b)    simulation output

c)     recommendation to management

Scenario nr. 1

What profit and cash will be required in current settings?

Year

Profit

Cash required

2010

-1 046 000

14 150 000

2011

-1 043 000

15 816 000

       Production is pointless.

Scenario nr. 2

What profit and cash will be required in current settings when we stop paying leasing installments?

Year

Profit

Cash required

2010

6 430 000

6 674 000

2011

7 377 000

- 80 000

      The production makes sense but leasing company would not be happy...

Scenario nr. 3

What profit and cash will be required in current settings when we get a higher market share in orange juice of about 25%?

Year

Profit

Cash required

2010

-482 000

13 372 000

2011

-492 000

15 151 000

      Improvement is marginal.

Scenario nr. 4

What profit and cash will be required in current settings when we get a higher market share in apple juice of about 20%?

Year

Profit

Cash required

2010

1 769 000

11 956 000

2011

2 124 000

10 349 000

      If the increase is really possible from the marketing point of view, this scenario looks viable.

Scenario nr. 5

What profit and cash will be required in current settings when we get a higher market share in apple juice of about 20% but our business partners are not very reliable, bad receivables ratio will increase to 5%.

Year

Profit

Cash required

2010

1 708 000

13 353 000

2010

1 871 000

13 492 000

                There is an influence of interest, cash-flow is worse, but the scenario stays viable. 

 

Number of scenarios is practically unlimited. These above are simplified but show clearly where to go and what to expect when certain policy is applied.  Do you want to try it in your own business? Let us know, please.