Synopsis and Objectives
This case captures the problems concerning cash flow and working-capital management typical of small, growing businesses. At the end of 2005, Bob and Maggie Brown have completed their third year of operating Horniman Horticulture, a $1-million-revenue woody-shrub nursery in central Virginia. While experiencing booming demand and improving margins, the Browns are puzzled by their plummeting cash balance. The case highlights the difference between cash flow and accounting profits, as well as the common negative effects of growth on cash flow. It also provides a forum for instilling appreciation for the relevance of free cash flow to business owners and managers, introducing financial-ratio analysis, developing the concept of the cash cycle and working-capital management, and motivating the use of financial models.
1. What is your assessment of the financial performance of Horniman Horticulture? 2. Do you agree with Maggie Brown’s accounts-payable policy? 3. What explains the erosion of the cash balance?
4. What do you expect the financial position of the business to be in 2006? Extend the financial statements through 2006, assuming that Bob Brown grows revenue by 30%. Note: To make the balance sheet balance, define cash as equal to (Curr. liab. + Net worth) – (Accounts receivable + Inventory + OCA + Net fixed assets).
What are the alternatives for solving the business’s cash problem?
The free-cash-flow calculation provides a reasonable framework for establishing the alternatives facing the Browns.
a. Increase profits
Increase revenue. Horniman already seems to be growing the top line aggressively. It may be worth considering raising prices to improve margins and slowing unit growth. Although the Browns might consider further expansion into larger shrubs with better margins, such a move would incur an additional...