Case 9: Horniman Horticulture Essay

1. Strengths Profitability Ratios continual ripening from 2002-05, particularly year 2004 and 2005 with cogent growth in revenue with12.5% and 15.5% respectively, a good deal higher than the bench mark just now -1.8%. Gross, operational and sort out wampum margin were each(prenominal) performing better than the bench marks. Man coarse epochment Co-owner bobsled Brown has been brought up to value a strong work ethic, which he has obtained through his father since at young age by working for his father at the mill ab come out. After finishing his study, he returned to the mill and excelled at his job (supervisor) and was highly respected. bobsleigh was a people person, his heartily personality made beloved by all clients and employees.Weaknesses Activity Ratios signs increasely time to cop hires from gross sales 51 geezerhood year 2005 (far exceeded the benchmark 22 eld). old age of broth on hand (476 years) has been increase gradually much higher than the be nchmark (386 days). Payables turn everywhere (10 days) is too short comp bed with the benchmark (27 days) and slowly declined as years chap by. Liquidity problems seen through property on hand kept decreasing since 2002 and sharp shrivel upd in 2005 believably resulted from the bring out that quick collectables and slow receivables happened simultaneously any year. Since 2005, they had non reach their target vestibular sense of 8% exchange over constitutional revenue (fell to 0.9% 2005)2. save notes track down to the owners of the riotous (FCFE) for 2005FCFE = direct Cash commingle Change in top functional Capital Change in Investments operate profit 100.0 Taxes 39.2 + Depreciation 40.9 Operating cash flow 101.7 Capital exp terminationiture (4.5) attach 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 round of the dividing line for 2005CCC = Days stock list keen (DIO ) + Days gross revenue Outstanding (DSO) Days Payables Outstanding (DPO)= 476 + 51 10 = 517 (days)Using cash Even though HH had rapidly increase gross profit, direct profit and net profit since 2002, the homes cash balance had massively declined from $120,100 (2002) to $9,400 (2005). Increasing in inventory as extending property by 12-acres, with an expected neat use of $75,000 in 2006, HH has similarly increased their product range by 40%. Therefore cash has been used a lot in this period. The besotteds reliance terms have been amend as HH offers extended fee 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 making payments cinque times faster than receiving them. DIO is in addition a concern that HH has a hand in, HH is choosing to tenseness on more maturing plants, therefore its inventory leave behind naturally be thirster than the benchmark, in fact, HHs lowest end was still 10% over the benchmark.3. The growth trend would be expected to be stronger in 2006. However the cash famine is still a signifi fuckingt swerve due to both capital cost and working capital would be except increased in order to find thebusiness enlargement. Therefore, they need to work out some financial leverage to work this problem.Projected Horniman Horticulture Financial Summary (in thousands of dollars) 2002 2003 2004 2005 2006E 20% Profit and loss statement gross 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% share 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 gross revenue Depreciation 34.20 38.40 36.30 40.90 37.45 mediocre over 4 years 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% Similar as year 2005 Net profit 32.60 25.30 52.00 60.80 65.72 Balance cruise 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 some other 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 stock-still assets 332.10 332.50 384.30 347.90 300.10 fare 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 deserving 996.10 1021.40 1073.40 1134.20 1199.92 Capital expenditure 22.00 38.80 88.10 4.50 75.00 Purchases 140.80 145.20 161.20 185.10 224.13 17.86% 17.98% 17.75% 17.65% 17.81% Percentage of Sales 4. The come withs accounts-payable policy shortly 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 non suitable as their current reference work 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 infinitely make payment to suppliers early (adversely, HH should take advantage of the offered character reference terms allowing firm 30 days to payback for purchased goods), and also HH leave alone also reduce the assurance terms even though the sales probably drops, which would leave more cash available for firm as headspring as the cash cycle leave alone be shorter so that the business will avoid the insufficient liquidity of the cash. If HH does not change the policy, in the long run, the dearth of cash may adversely captivate the purchasing power and operate capacitance of the business and further businesss profitability.5. What can the company do to top its cash problem? Offers discount payment terms (i.e. 2% discount if payments are received within 10 days) modify 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-term period. Slows down the expansion pace to decrease the capital expenditure. Starts interchange product ranges that are not instant landscape plants (as these take a long time to mature and also can eliminate some risks for keeping the plants for longer periods of time feature of this industry desire heavily on weather that is unpredictable) face lift funds starts financing through debt, also can receive thetax plate benefit on interest payments. Transform s business from sole proprietorship into partnership in effort of not only increasing cash available for business that also receiving contributions of property, labor and skills form partners.6. place the sustainable growth of the company in 2005Sustainable growth = ROA x leverage x Retention 5.36% ROA (Net profit / append assets) 5.15% Leverage (Total Assets/Net Worth) 1.04 Retention (1- Dividend Payout ratio) 1.00 scotch profit = (ROA Cost of capital) x Total Assets -57.35 Cost of capital 10.00% Total Assets 1181.50 Net Worth 1134.20 The negative economic profit shows that the firm does not earn a sufficient return on capital. The firm is facing their dismissing take aim of cash and as a result, the negative cash level in the forthcoming years will be clearly observed. As shown above, the mass 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 their 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.