Case 9: Horniman Horticulture Case Studies in Finance

1136 words 5 pages
Case 9: Horniman Horticulture

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
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The main area cash is being held up in is in accounts receivable and inventory. As shown by Exhibit 2, the cash cycle in 2005 was 517.3 days. Reflecting on previous years this figure is up 10% from 2004 and 15% from 2002. Compared with the benchmark of publicly traded horticulture producers with a cash cycle of 381.2 days, which is 35% lower than Horniman Horticulture. This needs to be addressed if the firm wishes to keep its business afloat. Some suggestions to solve the problem of having cash held up in accounts receivable are: * Offering discount payments terms similar to Horniman’s suppliers (a discount of 2% if payments are received within 10 days) * By having loyalty/preferred customer schemes. Giving priority to customers who pay within a certain time frame * Down payments of products sold, at least then a portion of the sales would be in immediate cash Some suggestions to solve the problem of having cash held up in inventory are: * Stop increasing the product range * Start selling product ranges that aren’t “instant landscape” plants, as these take a long time to mature. Maggie needs to weigh up the cost of selling them today, compared to keeping them in inventory and selling them for a slightly higher price. There is also a higher risk for keeping the plants for longer periods of time and this isn’t being reflected in their return on capital. Another alternative that the Browns should consider