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Horniman Horticulture Essay Example

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Horniman Horticulture Essay Example
Horniman Horticulture Case Study

Current State of Business

The factors looked at such as the profit margin, ROE, and ROA do paint the picture that the current state of the business is good. Revenues have increased on average 10% each year from 2002 to 2005. However during this time cash balances have decreased. Accounts receivable and inventory have increased in the same time span. Cash has decreased from $120.1 to $9.4, a decline of 92% over the four year time span. In the same period Accounts Receivable went from $90.6 in 2002 to $146.4 in 2005, an increase of 62%. Likewise, inventory has increased from $468.3 to $656.9, an increase of 40%. We do know that there are factors behind this increases and decreases, but has the change been beneficial for the business? The company’s revenues are growing year to year by an average of 10%, whereas their assets and equity are only growing by averages of about 5% year to year. Now we have a clearer idea of why the ROE and ROA are increasing year to year.

The increase in accounts receivable can potentially lead to an increase in bad debt expense. So while it is good to offer favorable terms to increase client base, the chances of non-payment also increase.

Concerns

We do agree with the presenting group regarding the concerns on the Inventory Turnover and the Days Receivable Outstanding. Days payable can be a concern; however it is not the reason that the cash balances are declining so drastically. By paying within the 10 day window, they are getting some discounts which might look as a good idea to cut cost and have more cash available. However, they are not receiving money as quickly as they would hope, which is shown by the 9 day increase in receivable days since 2002. Increasing the payable days or lowering the days receivable outstanding would reduce the cash conversion cycle. Doing both at the same time would reduce the conversion cycle by even more, but it would increase the expenses by 2% (discount for

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