Sula Vineyard Case Study

In: Business and Management

Submitted By lemondx
Words 372
Pages 2
The prospects of growth for wine in India are high as the expanding domestic wine market is projected to grow 25 – 30 percent per year. In anticipation of this market growth, Sula Vineyard should improve its operational cash flows by efficient management of working capital to help increase net profit (retained earnings). Additional equity funding through external source of capital such as preferred stock can provide quick access to funds and reduce the risk of financing through long term and short term loans. The issuance of preferred stock also preserves the ownership of the company since it does not give the holder voting rights.

Between year 2004 to 2007, Sula Vineyards has not been generating positive cash flow from operations (Exhibit 1). Cash shortage means the company is not operating profitably so it needs to secure new funds for the expansion of winery capacity and inventories. However, Sula Vineyards has not been able to generate sufficient operating income to cover interest expense so there is little room for taking extra debt (Exhibit 2). Upon close examination of the working capitals, Sula Vineyards’ negative cash flow is caused by unfavorable cash flows from inventories (Exhibit 3). The inventory turnover days have been increasing over the years as a result of change in product mix. On average, Sula Vineyards takes 475 days to sell its inventories. Hampered by the slow inventory turnover, the company cannot rely solely on internal source of capital generated through retained earnings, so issuing preferred stock can provide an influx of capital required for growth expansion.

Since India’s wine industry has just started to develop, competition is small and the market potential is huge (Exhibit 4). Sula Vineyards can use the most optimistic estimate in Scenario C to predict its revenue for the next five years. The company should first secure…...