1. Assess the strengths and weaknesses of the company Horniman Horticulture.
* Constantly growing firm with increasing revenue (15.5% in 2005), net profit, total assets and high returns on equity (5.1% in 2005) * Large product offerings, with a recent increase of 40%. Majority of offerings are in high demand * Management (in regards to Bob Brown) has good ties with employees and customers * Tax expense hasn’t drastically changed (34-39%)
* Stabilized depreciation, only rising 20% from 2002-2005.
* Massive liquidity problem, most cash is tied up in inventory and accounts receivable * Not hitting 8% of total revenue as cash margin
* Takes 51 days on average to receive payments from sales * Cash is held up for 517.3 days in 2005, well above the industry average of 381.2 days * Inventory takes 2-5 years to mature
* Decreased inventory turnover ratio
* Aversion to financing with debt
* Relaxed collection policy
* Unsustainable growth rate
2. How is the company using its cash?
* To buy more inventory and to extend their property by 12-acres, with an expected capital expenditure of $75,000 in 2006. In the past two years Bob Brown has also increased their product range by 40%. * Bob Brown is moving the product range to more mature plants, as they are in high demand and are selling for premium prices. Therefore a lot of cash is held up in inventory * With improvements to their credit terms, the Brown’s are now acting as a bank to customers as they are offering longer payment periods. This is leaving cash held up in accounts receivable for an average of 51 days. * Paying for purchases within the 10 day period to receive a 2% discount, this illustrates that the Browns are making payments five times faster than they are receiving them.
3. What do you expect the financial position of the...