Case 9: Horniman Horticulture Case Studies in Finance Essay
1. Assess the strengths and weaknesses of the company Horniman Horticulture. Strengths * Constantly growing firm with increasing revenue (15.5% in 2005), net profit, total assets and high returns on equity (5.1% in 2005) * Large product offerings, with a recent increase of 40%. Majority of offerings are in high demand * Management (in regards to Bob Brown) has good ties with employees and customers * Tax expense hasn’t drastically changed (34-39%) * Stabilized depreciation, only rising 20% from 2002-2005. Weaknesses * Massive liquidity problem, most cash is tied up in inventory and accounts receivable * Not hitting 8% of total revenue as cash margin …show more content…
4. Assess the company’s accounts-payable policy. Currently the Brown’s pay back suppliers in the first 10 days, averaging 9.9 days, to receive a 2% discount. This is nearly three times as fast as the industry average of 26.9 days. This doesn’t work well with their current credit terms offered to customers, as their receivable days are averaging at 51 days, which is double the industry average. With a high net profit margin of 5.8%, 3% higher than the industry benchmark, the Brown’s don’t need to continually pay suppliers back early, which would leave more cash available. The accounts-payable policy Maggie Brown has adopted will not be sustainable in the years to come as they have a massive liquidity problem at hand. The suppliers have credit terms allowing them 30 days to payback for purchased goods, and Maggie should be taking advantage of that. 5. What can the company do to solve its cash problem? Currently the Brown’s cash level is .9% of annual revenue, which is well below their target of 8%. Horniman Horticulture therefore has a massive liquidity problem, as the Browns are having issues with converting revenue into cash. To solve this problem before they go bankrupt
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