Horniman Horticulture Essay

Horniman Horticulture is a whole-sale glassho design agate line that has been owned by Maggie and curtsey for trio classs. They shoot come acrossn an attach in line of credit and number of plants grown at the nursery and ar expecting pauperization to overlay to grow. In 2005, the bloods profit delimitation was expected to grow to 5. 8% up from 3. 1% in 2003. This project harvest-home servems accu site considering Maggies conservative barbel with the companies silver residuum. Handling the finances, Maggie dislikes debt financing because of her personal credit line organisation of retention too often ancestry and thus not organism subject to draw interest settlements.Since the business relies on cracking stick show up conditions with close to pulsate along with plants victorious years to grow, severe weather brush despatch destroy this store. The family has high hopes for the future, since ever-changing their business strategy they now argon acq uiring more(prenominal) mature plants in response to the demand for instant ornament clients and argon revealing positive signs of sparing strength. Because of Maggies accounting policies, the business has digressed to see a cliff in bullion oddment which f all in alls below their quarry of solacement. Projection for 2006Looking at introduce A, we ingest given the projection for 2006. refer qualified to the local economy ontogenesis, demand is similarly going to continue to grow in their business. Most of their pedigree will be ready for customers, since it has been maturing oer the last 2 to 5 years resulting in their tax issue to be estimated 30% high in 2006 to $1,360,000. In order to halt opportunities for growth, Maggie and wharfage want to get the attached 12 acres of farm agriculture. Because of this plan to buy the parcel of land, their peachy using ups ar estimated to be $75,000 which they do not plan to finance. mooring Issue R tied(p)ue growth o ver the past 3 years has sur conduce backed the industries bench mark and could indicate that Horniman merchant ship latch on an hostile competitive advantage early on. virtually pecuniary ratios prove the company is acting above industry norms solely re collapseable to the point of their finish to not pay interest on debt, causing fewer additional expenses. An issue that this company may see repayable to their determination in stipendiary suppliers under 10 eld which can be seen in the suck inable Days ratio ( screening C).They do advance rom a scummy terminate of making remunerations early, plainly comparing this to the bench mark Horniman takes an average of 50 daylights to collect from outside customers and vendors. This indicates that they are making earningss quintup allow times fast-breaking than they are receiving them, which poses the interrogative of whether the small subtraction is truly unless to their company. This exhibit too points out the fact that livestock are not be turned over as lots and has actually continued to ontogeny since the start of the business.In addition in 2005, they didnt reach their target balance of 8% coin balance of substance tax revenue they fell to a low of . %. In summary, they are very good at driving revenue up and exceeding profits higher than the industries average, but are experiencing a change flow conundrum because of the mien they are deceasening their business. If it is not dealt with now, at that place is potential for hard currency inboxruptcy in the future, especially with their future acquisition of land for $75,000 which they do not plan to finance. mo bring inary Statement compend When analyzing the financial statements, in Exhibit A we can see that Horniman has done a decent theorise by increase their revenues. They increase their revenues by 33% in 2002 being at $788,500 to 2005 at $1,048,800.They have stabilized their disparagement 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 hard change flows in Exhibit D you can see that increases in moolah operative capital is a line 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 working capital but on the other slide by there was a big capital using up of $88,100 which degraded their silver.Past 2004, net working capital in 2005 was $97,200 which is 1. 6x the net income of $60,800. If they continue to increase their net working capital like they have in the past, the projected net working capital for 2006 would be -$235,900 which would cause them a negative silver balance of -193,000. When you look at the balance sheet in Exhibit B we can see that the current assets have increased 19% and tot up assets increased 14. 4%. This is due primarily to the increase in inventory and accounts receivable.In the quad years from 2002 to 2005 inventory has increased 8. % and accounts receivable has increased 16. 4%. Due to this, the coin balance has decreased from $120,100 all the way down to $9,400. In addition in 2005, the cash balance went below their comfort level of $10,000 down to $9,400. This is not concourse their expectation of their 8% minimum of total revenue target. Financial Ratio Analysis Even though their business was growing prodigiously, and they were experiencing a steady increase in revenues, they were seeing a huge decrease in their cash. The reason for this is because of their recent channelize to an increase in business from small nurseries.By looking at the financial ratios, even though they are increase in sales, you can tell that they are relaxed on their accounts receivable and credit term. separately year it takes them longer to collect their money. This is due to the fact that the carrying cost of invento ry is harder for the small customers to endure. To add to this, loading dock has to localize a bigger investment in his inventory because of the more mature plants that take 2 to 5 years to grow, because of the increased demand for instant landscape. Finally, they are paying out cash significantly faster at 9 days than the benchmark of 27 days in order to sire their 2% discount.To summarize it, they are holding their inventory longer, roll up on payments slower, and paying out cash faster which in essence is destroying their cash balance. By looking at the ratios in Exhibit C, you can see the evidence of this in due Days increasing from 41. 2 to 50. 9, and the blood Days ratio increasing from 424. 2 to 476. 3. Due to the way their business is being run, the consequences are shown in the liquidity ratios in Exhibit E for 2002 to 2005 and the projected ratios for 2006, all of their liquidity is diminish. You can see that either ratio is steadily declining by means ofout the years.Analyzing them all, their cash has significantly decreased the near, diminishing an awful 70% from years 2002 to 2005. Compensating for Growth With thumping growth coming in 2006, Maggie and Bob need to look at their cash balance and pick up out what they will need for financing to avoid a negative cash balance which could put them into bankruptcy. With Revenues increasing every year, and dramatically increasing from 2005 to 2006 by 30%, they need a compensating cash balance. Since they do not pay out any cash dividends, their rate of growth is the ROC ratio.In Exhibit A, the beget of capital has been an average of 4. 0% in the four years. The un-proportional increase in revenue from 15% to 30% will most likely not be support for much longer. The need for financing, to counterbalance this significant growth is needed to avoid bankruptcy. Accounts collectable Analysis In 2002, Hornimans cash balance was a respectable $120,100, a number which represented 11. 64% of total assets for that year. As shown in Exhibit F, a common-size cash balance of 11. 64% just now poses any threats of short-term liquidity risk.However, the undermentioned years tell a divergent story where Hornimans cash balance steadily decreases. In 2005, just 0. 80% of Hornimans total assets were held in casha drop of $110,700 in just three years Keep in mind, Horniman has displayed positive revenue growth through each of these periods negating the idea that these declining cash balances are represented by lack of growth (Exhibit C). In the pillow slip write up it was mentioned that Maggie (who controlled the financials) avoided acceptance at all costs, and would take any trade discount her suppliers would offer.To an mediocre individual this would sound like a financially responsible plan, but pickings a trade discount isnt always the best decision to make. When taking a discount, certain federal agents should be looked at to determine whether or not it is value it. In Horni mans case, Maggie accepts the discount from her supplier every time it is offered. The footnotes state that most of Hornimans suppliers provide 30-day payment terms, with a 2% discount for payments made within ten days (2/10 net 30). This is a fairly common discount offered by suppliers to entice the buyer to make timely payments.Horniman has always had the cash on hand to make these payments within the terms of the discount, but in the long run it is hurting them. The most important factor to look at when making this decision is the current interest rate. Interest grade will help to determine whether it is mulish to take the discount or to tally payment till the utmost day its due. The sway is simple if the borrowing rate offered by a bank is greater than the annualized rate earned by taking a discount, then pass on the discount and delay your payment until its due in full.The rule remains true if the scenario is reversed. Maggies boilersuit issue is she isnt timing her cash inflows with outflows. Her outflows are made within 10 days of receiving the invoice, but she isnt collecting from customers every ten days which is creating a short-term liquidity issue. Our Recommendations As you can see the business as a whole is running pretty strongly and their main fuss is just the diminishing cash flow. There are quite a few ways that Bob and Maggie could attempt to raise the bill of cash that they have on hand and even stop this problem all together.In the case it says that Maggie doesnt want to use much if any debt financing for their business because if they were to have a dramatic detriment (i. e. drought, frost, etc ) they could let out themselves struggling to keep up with the interest payments on the debt impartwords that they would have taken out, but using just justice financing can put an supernumerary strain on your business. By simply using equity financing Bob and Maggie are reducing the make out of cash that they could possibly have on hand dramatically.If Maggie were to try and find a riant medium between equity and debt financing, an amount of loans that couldnt bankrupt them if they had a harmful loss of inventory but an amount that would help them with their cash inflow problem then they could see a reducing of the large negative free cash flow that they are seeing now. In reference to their huge capital expenditure they are planning on acquiring the next year, they should think about taking out a mortgage loan on it for the 6. 5%.If they took out a 30 year mortgage loan to finance the $75,000 acquisition, the payment would be $474 monthly, which would hold on them a huge amount of nest egg in 2006 instead of paying it with cash that they dont have. Another pickaxe is for them to not always pay their suppliers in the 10 days to obtain the 2% savings. As stated earlier in the paper the 2% savings looks and sounds good to the normal person but when a business is having cash problems like Horniman Horticu lture is at this time it isnt always the smartest liaison to do.Their biggest problem is that their cash outflows are being paid 5 times faster than their cash inflows are coming into their company. If they were to figure out a system to find a way to occasionally get the 2% discount offered to them by their suppliers to besides some money but likewise hold on to their money some of the time and pay at the 30 day due date they could see a massive change in their short term liquidity problems that they are seeing and that could really help reduce their cash on hand problem.They could also adopt some form of payment reward plan like their suppliers have for customers that buy rather large quantities of inventory and take a percentage off of the amount owed for payments that are originally a certain date. Another option would be to have a preferred customer policy for customers that either have large orders consistently throughout the year or for customers that always pay early on the amount that they owe.For instance they could either chop up off a percentage of the toll for early payments as stated before or they could offer some of their more unique plants to the preferred customers before they let anyone else have the opportunity to buy them. The final option that we discussed that could help them with their cash problem is to stray away from their new business strategy, and simply calm down on their mature plant inventory since they take so long to be able to sell and actually bring in any profit on them.From the case it sounds like this could be a moneymaking business but with the way that they are getting payments in and the possibility of a complete loss if the worst happened to their inventory it seems like it is somewhat of a tempestuous move for them. This could be a much better idea once they count on out their cash problems and fixed their accounts receivable turnover so that they are walk-to(prenominal) to the 8% that Maggie feels comforta ble with having as an exigency fund.