4. Company Background
• Bob and Maggie Brown purchased Horniman
Horticulture in 2002 for $999,000.
• Capital sources:
o Savings
o Proceeds from the sale of their house
o Minority-business-development grant
o Personal loan from Maggie’s farther
5. Company Background(2)
• 52 green houses and 40 acres of fields
• 12 full-time and 15 seasonal employees
• Markets: retail nurseries in mid-Atlantic
region
• Products: woody shrubs (azaleas, camellias,
hydrangeas, rhododendrons), annuals,
perennials, and trees.
6. Company Background(3)
Bob runs the nursery Maggie oversees finances
Increased the number of plant species
by 40% in the past 2 years
Kept tight rein on costs
Offered more mature plants for
“instant landscape”
prefer debt financing, avoided
bank borrowing
Paid vendors early to obtain
trade discounts
• Bob and Maggie are very optimistic about the future. They
plan on closing next month on a neighboring 12-acre parcel of
farmland.
• This expansion will total $75,000 in capital expenditures.
Currently, there is no plan to finance the purchase
11. Breaking Down The Cash Requirement
Analysis
• The cash requirement issue started in 2004.
• At that particular year, the company was in need of
5.88 Million (72.68-66.8) in order to achieve the
minimum requirement cash
• The same problematic goes to the next year as well
74.51 (83.91-9.4) in cash need in order to reach the
required minimum.
• Moreover, in the forecasted year (2006) the company
will be facing a negative cash flow which can
alternatively lead to a bankruptcy.
12. Company Vs Benchmark
2002 2003 2004 2005
Benchmar
k
Receivable days (AR / Revenue
* 365) 41.94 44.97 48.03 50.95 21.8
Inventory days (Inventory /
COGS * 365) 424.25 432.08
436.4
7
476.3
0 386.3
Payable days (AP / Purchases *
365) 15.55 13.32 10.19 9.86 26.9
NFA turnover (Revenue / NFA) 2.37 2.43 2.36 3.01 2.7
13. The forecasted Balance Sheet (2006)
Balance sheet 2002 2003 2004 2005 2006
Cash 120.1 105.2 66.8 9.4 -16.07
Accounts receivable 90.6 99.5 119.5 146.4 183.0
Inventory1 468.3 507.6 523.4 656.9 821.1
Other current assets 20.9 19.3 22.6 20.9 22.2
Current assets 699.9 731.6 732.3 833.6 1010.2
Net fixed assets 332.1 332.5 384.3 347.9 422.9
Total assets 1032.0 1064.1 1116.6 1181.5 1433.1
Accounts payable 6.0 5.3 4.5 5.0 4.7
Wages payable 19.7 22.0 22.1 24.4 26.2
Other payables 10.2 15.4 16.6 17.9 19.3
Current liabilities 35.9 42.7 43.2 47.3 50.2
Net worth 996.1 1021.4 1073.4 1134.2 1382.9
Total liabilities and equity 1032.0 1064.1 1116.6 1181.5 1433.1
15. Ratio Analysis
I. Quick Ratio
QR = Current Assets - Inventory
Current Liability
= $833.6 - $656.9 = 3.74 times
$47.3
II. Cash Ratio
CR = Cash = $9.4 = .20 times
Current Liability $47.3
III. Net Working Capital To Total Assets
= NWC (Current Assets - Current Liability)
Total Assets
= $833.6 - $47.3 = 0.67(67%)
$1,181.5
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16. Ratio Analysis (2)
Interpretation:
• Horniman Horticulture has ability of more than 3
times to its currents obligations
• Although it may look healthy, the business is actually
about to run out of cash
o Most of its currents assets are tied up to other
accounts
o This certified that HH does not have enough cash
to meet with its current obligations
• Working capital represents more 60% of the total
assets
o the more working capital, the more financing need
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17. Cash Cycle Analysis
• CC is a metric that expresses the length of time, in
days, that it takes for a company to convert resource
inputs into cash flows
• Cash cycle = Operating cycle – A/P period
= (A/R days + Inventory days – A/P days)
= (50.9 + 476.3 - 9.9)days
= 517.3 days
• The longer the cash cycle, the more financing is required
• A lengthening cycle can indicate that the firm is having
trouble with selling inventory or collecting on its
receivables
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CC of Industry is 381.2 days
18. Cash Cycle Analysis (2)
• HH has a cash cycle of more than 136.1 days than the
average industry
• The core causing of this severe cash/working capital
problem is due to;
I. Account Receivables
A/R are not being collected quickly
II. Inventory
Inventory are not moving rapidly
III. Account Payable
Firm is not taking the maximum credit
possible from suppliers, i.e. fast pay off to
suppliers.
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20. Bank Financing
• To facilitates the smooth running of the business
operations by meeting day to day financial
requirements, the firm should borrow.
• Revolving lines of credit
o Short-term borrowing from banks that is used to
finance working capital needs
o Works somewhat like a credit card
o Value of existing current assets that serve as
Collateral for the loan
o Include; bank borrowing, commercial paper, or
short-term notes
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21. Bank Financing (2)
• Although, Maggie refuses to take a bank loan and to
finance the company with debt
o the company is burning with cash
o Bad cash flows will deter the company’s growth
• Why for financing?
o The cash problem would drain the company’s growth
o The growth rate is definitely higher than the loan
repayment and interest rate.
• So, the company should finance its liquidity problem
with debt financing
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22. Account Receivable
• Most of the company’s cash is tied up on Accounts
receivable and inventory.
• To properly manage the company’s cash flow,
o negative cash flow affects caused by the time it
takes your customers to pay on their accounts.
• Horniman should come an effective policies and
strategies for managing account receivables
o Include; Follow up quickly, Bill early, discounts
• Suggestion: “Factoring” account receivables would be a
viable solution
o The sale of receivables to a bank or commercial
finance company
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23. Inventory days
• Inventory days of Horniman Horticulture was 1.23
times of average industry for 2005
o i.e. outstanding more than 90 days
• Inventory days is a key component in a company's
inventory management.
o Expensive to keep, maintain, etc.
o Protecting inventory from obsolescence
• Suggestion: Horniman Horticulture should change its
inventory policies
o strive to maintain the days sale of inventory to
industry average
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24. Accounts Payable days
• Fast pay off short term payables has increased the
net working capital
• HH pays its payable more than 5 times before it’s
collection from customers
• O.81 times for industry
• It should reduce some ratio close to benchmark
• Suggestion: Horniman Horticulture should change its
account payable policies
o starching its account payable days to around the
industry average (Benchmark)
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25. Recommendation
Holistic Approach Solution
• HH should take a loan from bank (Bank Financing)
o working capital financing
• It should balance between receivables and payables
• HH management should set new credit policy
• And reduce the receivable days to some lower point
• Also it should “factor” or sell part of its account
receivables to a third part
• HH should also modify/adjust their payables
policies
• it supposed to take the full terms of payables
• And leave the advantage to 2% discount in order to
retain cash in hands of the company
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