Chance Wahl

Feb. 25, 2013

Executive Summary Horniman Horticulture Case Study

Executive Summary:
Bob and Maggie Brown bought Horniman Horticulture, a family-owned business, from Maggies
parents in 2002 for $999,000. They both thoroughly enjoy the choice they made to own their own
business and have done an excellent job maintaining it as it has grown healthily over the first three years.
Bob runs the nurserys operations and Maggie oversees the companys finances. Contributing to the
success, from 2003 to 2005, Bob had grew the number of plant species grown at the nursery by more than
40%. He and his wife also kept a tight rein on costs and the business profit was obvious. The profit
margin had increased to an expected 5.8% in 2005, and Bob was confident with the success the local
economy was experiencing that a high demand would keep his business booming. Because much of his
inventory took two to five years to reach maturity, his expansion efforts had been in the works for a while
by 2005. He was optimistic that 2006 would be a banner year, expecting a 30% revenue growth rate. In
addition, ensuring their long-term growth opportunities, he and Maggie were hoping to expand their
business by closing on a neighboring 12-acre piece of farmland at the end of 2005.
Problem:
Although their profits were growing rapidly over their first few years, contrarily, the cash on hand
has been decreasing to a point where it was less than their target level of 8% of annual revenue in 2005.
What they ended up with was a liquidity problem, because most of their cash is tied up in inventory and
accounts receivable. It seems apparent, too, that the unsustainable growth rate is realized as the cause for
their depleting cash balance. Their impressive growth is attributed to their heavy asset investment in
growing the size of their nursery, yet it has brought the firms cash balance to below $10,000 at the year
end of 2005. Achieving sustainable growth to the point where the cash flow is not decreasing each year,
but instead accompanying for at least 8% of their annual revenue each year, is the goal. Also, in an
attempt to remain financially responsible, Maggie refuses to take a bank loan and refuses to finance the
company with debt. Yet they are acting as a bank to customers since they offer such long payment
periods. They are leaving cash held up in accounts receivable for an average of 51 days and in order to
obtain all trade discounts, are making payments within 10 days.
Analysis:
Horniman Horticulture is a constant and consistently growing firm with increasing revenue
(15.5% in 2005), net profit, total assets and have a high ROE (5.1% in 2005). They have a large product
offering, with a recent increase of 40%. The majority of their offerings are in high demand now as well
since their inventory has matured. But because Horniman Horticulture is making payments to suppliers
within ten days to obtain trade discounts, and is only receiving accounts receivables every 51 days, this
illustrates how the Browns are making payments five times faster than they are receiving them. With an
assumed 30% sales growth by Bob, revenue for 2006 should be estimated at $1,363,440. This means
their target cash balance at the end of 2006 should equal $109,075.20 at 8% of annual revenue. For 2005,
to reach their 8% benchmark for cash, they were supposed to retain $83,904 cash at the years end. In
2006, taking into account their 30% projected revenue growth rate, they will have revenue of $1,363,440
and therefore they would be required to retain $109,075.20 in cash to meet their 8% benchmark and
unless they decrease their revenue growth greatly their cash will fall short and be negative for 2006.
Recommendation:
Although theyre determined to maintain financial responsibility by avoiding financing with debt,
the company is burning through cash. If nothing is done, their negative cash levels will hinder their
companys growth. Therefore, I believe it to be in their best interest to take out a loan, and with their
growing business and sound financial policies, I believe they can successfully finance any loan. For
example, if they planned to finance the purchase of the neighboring farmland, mortgage rates were
running at 6.5%. With their estimated growth and profit rates running much higher than that, they would
seem to be in good shape.