Case 9: Horniman Horticulture Essay

1. Strengths Profitability Ratios Constant egress from 2002-05, particularly year 2004 and 2005 with impressive growth in revenue with12.5% and 15.5% respectively, frequently higher(prenominal) than the benchmark just -1.8%. hoggish, operating(a) and groundwork profit delimitation were all performing better than the benchmarks. Management Co-owner Bob Brown has been brought up to value a strong work ethic, which he has obtained through his catch since at young age by works for his father at the mill. After finishing his study, he returned to the mill and excelled at his job (supervisor) and was exceedingly respected. Bob was a people person, his warm personality do beloved by all customers and employees.Weaknesses Activity Ratios takes increasingly time to befool hires from sales 51 days year 2005 (far exceeded the benchmark 22 days). geezerhood of inventory on clear (476 days) has been increased gradually much higher than the benchmark (386 days). Payables turnover ( 10 days) is too short compared with the benchmark (27 days) and slowly declined as farsighted time pass by. Liquidity problems seen through capital on hand kept decreasing since 2002 and sharply reduced in 2005 probably resulted from the anesthetize that quick payables and slow receivables happened simultaneously every year. Since 2005, they had not reach their mastermind balance of 8% cash over total revenue (fell to 0.9% 2005)2. innocent(p) cash flow to the owners of the firm (FCFE) for 2005FCFE = in operation(p) funds Flow miscellany in boodle Working Capital Change in InvestmentsOperating profit 100.0 Taxes 39.2 + dispraise 40.9 Operating cash flow 101.7 Capital disbursal (4.5) Increase in NWC (156.3) Increase in CA 803.3 642.9 = 160.4 - Increase in CL 47.3 43.2 = (4.1) Free cash flow (59.10) Cash oscillation of the affair for 2005CCC = Days Inventory owing(p) (DIO) + Days sales Outstanding (DSO) Days Payables Outstanding (DPO)= 476 + 51 10 = 517 (days)Using cash tied(p) though HH had rapidly increased gross profit, operating profit and net profit since 2002, the firms cash balance had massively declined from $120,100 (2002) to $9,400 (2005). increase in inventory as ext peculiaritying property by 12-acres, with an judge pileus expenditure of $75,000 in 2006, HH has also increased their harvest-tide range by 40%. Therefore cash has been used a lot in this period. The firms character cost have been improved as HH offers longer compensation periods for customer (DSO of 51 days), firms payment of purchases within 10 days (DPO) to receive a 2% discount, this shows that HH is qualification payments five times faster than receiving them. DIO is also a concern that HH has a hand in, HH is choosing to focus on more maturing plants, therefore its inventory forget naturally be longer than the benchmark, in fact, HHs lowest end was still 10% over the benchmark.3. The growth trend would be expected to be stronge r in 2006. However the cash deficit is still a significant issue due to both capital expenditure and working capital would be further increased in order to withstand the condescension expansion. Therefore, they need to work out some financial leverage to solve this problem.Projected Horniman Horticulture Financial Summary (in thousands of dollars) 2002 2003 2004 2005 2006E 20% Profit and departure statement Revenue 788.50 807.60 908.20 1048.80 1258.56 Cost of goods sold 402.90 428.80 437.70 503.40 630.49 51.10% 53.10% 48.19% 48.00% 50.10% Percentage of gross sales Gross profit 385.60 378.80 470.50 545.40 628.07 SG&A expense 301.20 302.00 356.00 404.50 482.53 38.20% 37.39% 39.20% 38.57% 38.34% Percentage of Sales Depreciation 34.20 38.40 36.30 40.90 37.45 Average over 4 days Operating profit 50.20 38.40 78.20 100.00 108.09 Taxes 17.60 13.10 26.20 39.20 42.37 35.06% 34.11% 33.50% 39.20% 39.20% correspondent as year 2005 Net profit 32.60 25.30 52.00 60.80 65.72 Balance sheet Cash 120.10 105.20 66.80 9.4013.43 Accounts receivable 90.60 99.50 119.50 146.40 160.24 11.49% 12.32% 13.16% 13.96% 12.73% Percentage of Sales Inventory 468.30 507.60 523.40 656.90 763.03 59.39% 62.85% 57.63% 62.63% 60.63% Percentage of Sales separate current assets 20.90 19.30 22.60 20.90 20.93 Average over 4 years Current assets 699.90 731.60 732.30 833.60 957.62 Net fixed assets 332.10 332.50 384.30 347.90 300.10 chalk up assets 1032.00 1064.10 1116.60 1181.50 1257.72 Accounts payable 6.00 5.30 4.50 5.00 5.20 Average over 4 years Wages payable 19.70 22.00 22.10 24.40 31.41 2.50% 2.72% 2.43% 2.33% 2.50% Percentage of Sales Other payables 10.20 15.40 16.60 17.90 21.19 1.29% 1.91% 1.83% 1.71% 1.68% Percentage of Sales Current liabilities 35.90 42.70 43.20 47.30 57.80 Net worth 996.10 1021.40 1073.40 1134.20 1199.92 Capital expenditure 22.00 38.80 88.10 4.50 75.00 Purchases 14 0.80 145.20 161.20 185.10 224.13 17.86% 17.98% 17.75% 17.65% 17.81% Percentage of Sales 4. The conjunctions accounts-payable policy Currently the firms DSO was 10 days (in order to receive a 2% discount), approx. 2.7 times as fast as the benchmark of 27 days. This policy is not desirable as their current credit terms offered to customer up to 51 days, which is double the benchmark. The firms net profit margin was 5.8% (the benchmark is just 2.8% 2005), so HH does not need to continuously make payment to suppliers early (adversely, HH should take advantage of the offered credit terms allowing firm 30 days to payback for purchased goods), and also HH will also reduce the credit terms even though the sales probably drops, which would leave more cash available for firm as well as the cash cycle will be shorter so that the business will suspend the in fitted liquidity of the cash. If HH does not change the policy, in the long run, the deficit of cash whitethorn adversely influence the purchasing power and operating capacity of the business and further businesss profitability.5. What can the familiarity do to solve its cash problem? Offers discount payment terms (i.e. 2% discount if payments are received within 10 days) enable HH to collect cash immediately. Takes advantage of the offered credit terms (allow firm 30 days to payback the purchased goods) keeps more cash for operating activities in long period. Slows down the expansion pace to decrease the capital expenditure. Starts selling product ranges that are not instant landscape plants (as these take a long time to mature and also can eliminate some risk of exposures for retentiveness the plants for longer periods of time feature of this industry rely heavily on weather that is unpredictable) Raising funds starts financing through debt, also can receive thetax shield benefit on interest payments. Transforms business from sole proprietorship into partnership in effort of not completely increasing ca sh available for business but also receiving contributions of property, mash and skills form partners.6. Calculate the sustainable growth of the company in 2005sustainable growth = ROA x Leverage x Retention 5.36% ROA (Net profit / Total assets) 5.15% Leverage (Total Assets/Net Worth) 1.04 Retention (1- Dividend Payout ratio) 1.00 Economic profit = (ROA Cost of capital) x Total Assets -57.35 Cost of capital 10.00% Total Assets 1181.50 Net Worth 1134.20 The blackball economic profit shows that the firm does not earn a sufficient return on capital. The firm is facing their dismissing level of cash and as a result, the negative cash level in the forthcoming years will be clearly observed. As shown above, the majority of the firms cash expenditure is held up in inventory (with cash cycle being 517 days compared with the benchmark of 381 days) and account receivables (due to the collection policy). The trade-off that company has to face is an increase in th eir credit terms. Even though this may reduce the sales volume, the company will probably avoid the risk involved with having a more mature product range.