Horniman Horticulture: Synopsis and Objectives

This case captures the problems concerning cash flow and working-capital management typical of small, growing businesses. At the end of 2005, Bob and Maggie Brown have completed their third year of operating Horniman Horticulture, a $1-million-revenue woody-shrub nursery in central Virginia. While experiencing booming demand and improving margins, the Browns are puzzled by their plummeting cash balance. The case highlights the difference between cash flow and accounting profits, as well as the common negative effects of growth on cash flow.

It also provides a forum for instilling appreciation for the relevance of free cash flow to business owners and managers, introducing financial-ratio analysis, developing the concept of the cash cycle and working-capital management, and motivating the use of financial models.

Increase revenue

Horniman already seems to be growing the top line aggressively. It may be worth considering raising prices to improve margins and slowing unit growth. Although the Browns might consider further expansion into larger shrubs with better margins, such a move would incur an additional inventory-investment cost. Reduce operating costs. The case suggests that the business is run efficiently.

Reduce investment

Improve receivable-collection time. Horniman is well above industry norms. One can question the wisdom of growing the small-nursery business, which appears to require generous financing terms. Improve inventory days. This is part of Horniman’s business; it is unclear whether the inventory can be improved, particularly if they are moving to more-mature plants. The analysis to make this trade-off is similar to that of the payables policy. One would divide the expected margin gain by the increase in inventory levels to compute a marginal return on capital. One additional level of concern is the substantial additional risk associated with increasing inventory when facing uncertainty with respect to the effects of interest rates and adverse weather.

Reduce investment in net fixed assets

Horniman already seems to be operating efficiently. NFA turnover has increased strongly over the past year; in fact, there is valid concern that capital expenditures are going to need to increase going forward. c. Increase business financing Debt or equity financing. With annual free cash flow reaching levels of  $278,000, the business is burning a lot of cash. One should expect that if nothing is done to the business model, debt requirements will become larger and larger.

 

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Horniman Horticulture: Synopsis and Objectives. (2019, May 01). Retrieved from https://graduateway.com/horniman-horticulture/