Horniman Horticulture

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Horniman Horticulture Case Study

Current State of Business

The factors looked at such as the profit margin, ROE, and ROA do paint the picture that the current state of the business is good. Revenues have increased on average 10% each year from 2002 to 2005. However during this time cash balances have decreased. Accounts receivable and inventory have increased in the same time span. Cash has decreased from $120.1 to $9.4, a decline of 92% over the four year time span. In the same period Accounts Receivable went from $90.6 in 2002 to $146.4 in 2005, an increase of 62%. Likewise, inventory has increased from $468.3 to $656.9, an increase of 40%. We do know that there are factors behind this increases and decreases, but has the change been beneficial for the business? The company’s revenues are growing year to year by an average of 10%, whereas their assets and equity are only growing by averages of about 5% year to year. Now we have a clearer idea of why the ROE and ROA are increasing year to year.

The increase in accounts receivable can potentially lead to an increase in bad debt expense. So while it is good to offer favorable terms to increase client base, the chances of non-payment also increase.


We do agree with the presenting group regarding the concerns on the Inventory Turnover and the Days Receivable Outstanding. Days payable can be a concern; however it is not the reason that the cash balances are declining so drastically. By paying within the 10 day window, they are getting some discounts which might look as a good idea to cut cost and have more cash available. However, they are not receiving money as quickly as they would hope, which is shown by the 9 day increase in receivable days since 2002. Increasing the payable days or lowering the days receivable outstanding would reduce the cash conversion cycle. Doing both at the same time would reduce the conversion cycle by even more, but it would increase the expenses by 2% (discount for payments received between 10 days). Maggie’s aversion to taking on any debt would be more closely tied to the receivables outstanding. Most business take out LOC’s to cover their A/R in an event that there is a significant lag in payment. Since their ratio is currently at 50.9 days, if they are going to continue offering favorable credit terms, a LOC would be a useful buffer that could be paid off once the money is received and keep Maggie’s debt concerns down. Also, the fact that this ratio is increasing is possibly leading to more bad debt. Inventory turnover, is a concern that the company has a hand in, they are choosing to focus on more maturing plants so naturally HH inventory is going to be greater than industry average. However, even before the shift to this line their inventory turnover was still, on the low end, about 10% over the industry standards. From this we can say that there is another issue with their inventory turnover that is not just related to the shift to the more-mature plant line.

Horniman Horticulture Future

In the previous information we can clearly see how growth affects cash flow. To have a better idea of this relationship we decided to first construct the cash flow statement. With the information we have it’s possible to recreate and project the 2003, 2004, 2005 and 2006 operating cash flow. The first thing that we notice is that the operating cash flow is negative for years 2003, 2004 and 2005. The company is consuming the cash it has as the cash balance declines year after year but they are able to stay alive and pay its debts to vendors and employees. In 2006 the situation becomes critical because they are planning to spend 90.65 million and at the end of 2005 they only have 9.4 in cash. (Exhibit 1). The first question that arises now is: how are they going to finance the growth planned for 2006? HH clearly needs a source of funds.

The Brown’s have some alternative that they should consider. As said before, the...
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