Case 2

Topics: Generally Accepted Accounting Principles, Balance sheet, Accounts receivable Pages: 6 (1869 words) Published: September 18, 2012
CASE 9: Horniman Horticulture

1. Assess the strengths and weaknesses of the company Horniman Horticulture. - Horniman Horticulture has a variety of strengths and weaknesses, among them are a mix of quantitative numbers to support the performance as well as qualitative factors to support the performance. We should address the management to start with and their business philosophies. One of the co-owners Bob Brown has a very strong work ethic, which he has achieved through his fathers personal career path to become a foreman of a lumber mill in Southwest Virginia. Bob followed his father’s footsteps and was made supervisor at the lumber mill after his educational side was achieved, among working as a supervisor he was highly respected. Bob was a “people person” that customers and employees liked a lot. Their capability of having a very diverse yet specialized product range is a huge strength as they can have very close relationships to their customers and building a strong personal relationship to every individual. Among the quantitative strengths are the stable revenue growths, a high operating profit leading to a high net profit. With a stable and strong 25% growth rate this is one of their strongest aspects in the company and the growth rate is strongly correlated to Bobs determination of shifting the product mix to nurseries that were willing to pay more for plants that delivered “instant landscape”. The operating profit is also correlated to the high revenue growth as the gross profit increased leading to a higher operating profit and thus leading to an expected growth of 30,1% in net profit. A lot of the steady margin improvements were due to Bob’s responsive actions towards a growing demand from customers of more-mature plants, which shows a clear correlation from management sector directly affecting their financial sector. A positive aspect of Maggie paying her suppliers early is the gain in a 2% discount, but this also incurs a negative side as this means the company has less cash in hand at present time. The opportunity cost can be discussed whether or not the 2% is more beneficial than keeping the payments until the last day and using that money for other investments. Some weaknesses include their negative cash balance, Maggie´s negative view of debt financing, also a indirect weakness that could affect them severely is the debate within the U.S congress about the H2A certificate rate which a lot of the company’s positive margins relied upon. Maggie’s paranoid view of borrowing is related to her believing that certain interest payments could not be made if sudden change in weather condition could wipe out their entire inventory leaving both inventory and profits to 0. So that brings us to the other weakness of having a negative cash balance, as Maggie refuses bank borrowing they cannot turn nor reduce the negative cash balance as no loan will be taken thus resulting in zero leverage. The last weakness is the H2A-certified rate for non-immigrant foreign agricultural workers. It is indirectly a weakness affecting the company a lot as they are very dependant on government regulations that will determine this rate and thus the correlation to the firms various margins.

2. How is the company using its cash?

- Profit and loss statement (also referred to as income statement) tells us how the revenues and expenses were made during any given period of time. With the statement, the reader can see how the company is using its cash. According to Projected Financial Summary for Horniman Horticulture, the operating cash expenses are cost of goods sold (COSG), SG&A expense and taxes. As we can see from the appendix 1, the amount of the cash expenses increased constantly. In terms of COGS, the increased figures represent that Horniman spent more cash to purchase materials from outside, or to manufacture more Horniman’s products. The increased amount of SG&A expense refers to the increased in the daily...
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