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 Maggie’s

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 nursery’s operations and Maggie oversees the company’s 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 firm’s 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 year’s 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 they’re 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

company’s 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.