Horniman Horticulture

724 Words Feb 22nd, 2013 3 Pages
Case #9: 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
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b. 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. It is unclear whether Maggie is interested in leveraging the business and risking possible default with an adverse weather event.

HORNIMAN HORTICULTURE Projected 2006 Free