Sula Vineyard Case Study
In order to capitalize on the expanding Indian domestic wine market projected to grow 25-30 percent per year and continue Sula Vineyard’s current growth trajectory, Sula Vineyard should consider improving its operational cash flows by efficient management of working capital which will help in the generation of additional profits. Equity funding through internal sources of capital such as retained earnings will reduce the risk of financing through long and short term loans where there could be high interest payments or stringent covenants.
The use of retained earnings also avoids the possibility of a change in control of the business resulting from an issue of common or preferred shares. Analyzing Sula Vineyard’s Cash Flow Statement we can see that between 2004 and 2007 there has been a negative cash flow from operations (Exhibit 1). Generation of cash surpluses from operations is vital for Sula Vineyard to operate profitably.
Sula Vineyard’s projected growth also depends on securing new funds at a reasonable cost, with least amount of risk and on investing those funds for the construction of a third planned winery for its rapidly growing operational needs and for it to keep up with the projected demand for wines in the domestic market. The best and cheapest source for cash exists as working capital right within the business itself. In further analysis of the drivers of working capital, it is seen that Sula Vineyard’s negative cash flow is primarily caused by unfavourable cash flows from inventories (Exhibit 2).
It can also be seen that Sula Vineyard takes on an average 480 days to sell its inventory (Exhibit 3). It would be advisable for Sula Vineyard to focus its operational efforts in production of white wine and import red wines as it had originally done with ‘Satoni’ to further expand its product portfolio. Producing red wines leads to slow inventory turnover as certain red wines can only be sold two to three years after the date of production due to its aging process. This affects cash flows which in turn affect company’s profitability and its ability to finance its investments from retained earnings.
White wines also go well with Indian cuisines which have already been identified by Mr. Kerry and you. In conclusion, consulting Exhibits 4 and 5, we can further see that percent revenue from white wines far exceeds that of red wines. Hence Sula Vineyard should continue with the production and distribution of its premium white wines and buy/import red wines in order to improve cash flows, profitability and its retained earnings which in turn would be a driver for its future financing needs.