Horniman Horticulture is a whole-sale nursery business that has been owned by Maggie and Bob for three years. They have seen an increase in business and number of plants grown at the nursery and are expecting demand to continue to grow. In 2005, the business’s profit margin was expected to grow to 5.8% up from 3.1% in 2003. This projected growth seems accurate considering Maggie’s conservative approach with the companies cash balance. Handling the finances, Maggie dislikes debt financing because of her fear of holding too much inventory and thus not being able to make interest payments. Since the business relies on good weather conditions with some mature plants taking years to grow, severe weather can destroy this inventory. The family has high hopes for the future, since changing their business strategy; they now are acquiring more mature plants in response to the demand for “instant landscape” customers and are seeing positive signs of economic strength. Because of Maggie’s accounting policies, the business has started to see a decrease in cash balance which falls below their target of comfort. Projection for 2006
Looking at Exhibit A, we have given the projection for 2006. Due to the local economy growing, demand is also going to continue to grow in their business. Most of their inventory will be ready for customers, since it has been maturing over the last 2 to 5 years resulting in their revenue growth to be estimated 30% higher in 2006 to $1,360,000. In order to have opportunities for growth, Maggie and Bob want to buy the neighboring 12 acres of farmland. Because of this plan to buy the parcel of land, their capital expenditures are estimated to be $75,000 which they do not plan to finance. Case Issue
Revenue growth over the past 3 years has surpassed the industries benchmark and could indicate that Horniman can take an aggressive competitive advantage early on. Some financial ratios prove the company is performing above industry norms solely due to the fact of their decision to not pay interest on debt, causing few additional expenses. An issue that this company may see due to their determination in paying suppliers under 10 days which can be seen in the Payable Days ratio (Exhibit C). They do benefit from a small discount of making payments early, but comparing this to the benchmark; Horniman takes an average of 50 days to collect from outside customers and vendors. This indicates that they are making payments five times faster than they are receiving them, which poses the question of whether the small discount is truly beneficial to their company. This exhibit also points out the fact that inventory are not being turned over as often and has actually continued to increase since the start of the business. In addition in 2005, they didn’t reach their target balance of 8% cash balance of total revenue; they fell to a low of .9%. In summary, they are very good at driving revenue up and exceeding profits higher than the industries average, but are experiencing a cash flow problem because of the way they are running their business. If it is not dealt with now, there is potential for bankruptcy in the future, especially with their future acquisition of land for $75,000 which they do not plan to finance. Financial Statement Analysis
When analyzing the financial statements, in Exhibit A we can see that Horniman has done a decent job by increasing their revenues. They increased their revenues by 33% in 2002 being at $788,500 to 2005 at $1,048,800. They have stabilized their depreciation as it only rose 20% from 2002 to 2005 ($34,200 to $40,900). Also, their tax expense did not increase dramatically by staying around 34 to 39%. After looking at the free cash flows in Exhibit D you can see that increases in net working capital is a problem with the business. In the first year their net working capital was $44,800 which is 1.4x the net income of $32,600. In 2004, there was an improvement in net...