Case 11
Case 11
Horniman Horticulture
1. What is your assessment of the financial performance of Horniman Horticulture?
a. Horniman has strong profitability and no long term debt. Revenues are growing and the net profit is growing with it. They have continued to grow revenues while keeping COGS stable at 48-53%. SG&A is also a steady 38-39%. In addition the ROA and ROC are both way above industry standards. However, the company’s cash available has dramatically decreased from 11 to less than 1% over the past 4 years while their receivables have grown steadily.
2. Do you agree with Maggie Brown’s accounts-payable policy & What explains the erosion of the cash balance?
a. I do not agree with Maggie's AP policy. Back in 2002 I would have made the argument that they had sufficient cash on hand and should take advantage of the discount, but with less than $10k in cash and no borrowing capability, one large event, such as freezing crops could deplete their funds. Having a check returned for insufficient funds could make a vendor require payment on delivery and eliminate their 30 days terms, depleting their cash even more. The DPO of 9.9 is way under the industry standard and creates a large gap in DSO to DPO. It takes an average of 50.9 days to receive their revenues while paying their vendors on an average of 9.9 days. This would help explain their erosion of the cash balance. The remainder of their cash looks to be sitting in their Inventory and increase in AR. They have seen a 10% increase in these from 2004 to 2005.
3. What are the alternatives for solving the business’s cash problem?
a. I would recommend opening a line of credit to draw from when needed. I would also recommend financing their $75 CapEx projects for 2006 and free up the cash for other expenses.
4. Will strong business performance in 2007 improve the cash position?
a. The company is already profitable. This does not mean they will have a good cash position. Maggie needs to close the gap between DPO
Horniman Horticulture
1. What is your assessment of the financial performance of Horniman Horticulture?
a. Horniman has strong profitability and no long term debt. Revenues are growing and the net profit is growing with it. They have continued to grow revenues while keeping COGS stable at 48-53%. SG&A is also a steady 38-39%. In addition the ROA and ROC are both way above industry standards. However, the company’s cash available has dramatically decreased from 11 to less than 1% over the past 4 years while their receivables have grown steadily.
2. Do you agree with Maggie Brown’s accounts-payable policy & What explains the erosion of the cash balance?
a. I do not agree with Maggie's AP policy. Back in 2002 I would have made the argument that they had sufficient cash on hand and should take advantage of the discount, but with less than $10k in cash and no borrowing capability, one large event, such as freezing crops could deplete their funds. Having a check returned for insufficient funds could make a vendor require payment on delivery and eliminate their 30 days terms, depleting their cash even more. The DPO of 9.9 is way under the industry standard and creates a large gap in DSO to DPO. It takes an average of 50.9 days to receive their revenues while paying their vendors on an average of 9.9 days. This would help explain their erosion of the cash balance. The remainder of their cash looks to be sitting in their Inventory and increase in AR. They have seen a 10% increase in these from 2004 to 2005.
3. What are the alternatives for solving the business’s cash problem?
a. I would recommend opening a line of credit to draw from when needed. I would also recommend financing their $75 CapEx projects for 2006 and free up the cash for other expenses.
4. Will strong business performance in 2007 improve the cash position?
a. The company is already profitable. This does not mean they will have a good cash position. Maggie needs to close the gap between DPO