Case 9 - Horniman Horticulture Case Solutions

Case Analysis:

It is the case highlighting the difficulties in cash flow management and proper analysis of working capital for Small to medium scale businesses which are in their growing phase. In the case the owner of Horniman Horticulture, Bob Brown is experiencing some problems with the company’s recent financial performance in the form of cash flows

Description of the Problem:

• Bob’s net income that he takes home in the form of a salary is low compared to the increasing revenue and operating profits

• Liquidity Problem: It has subsided below 8% level of the yearly revenue in 2005

o Reasons:

 Majority of cash is tied to inventory and accounts receivable.

 Growth: Which is a result of investment in assets to grow the nursery has in turn resulted in depletion of available cash with the organization.

 Business model

• Account receivable=51 days (Benchmark days 21.8)

• Account Payable: obtain trade discounts; they are making payments in 10 days.

• Inventory days at Horniman were 476.3 in 2005 and the benchmark was at 386.3 days.

 Refusal to take loan so as not to finance the company with debt.

 Decreased inventory turnover ratio

Goal: Sustainable growth keeping in tandem with the cash management keeping it more than 8% of annual revenue

Possible Solutions:

• Decrease accounts receivable days.

o Receivable days are calculated using the following formula:

 Accounts receivable/revenue*365

o By collecting debts sooner, the cash balance would increase and accounts receivable would decrease.

o Preferred customer policy for customers that either have large orders or customers to pay early on account receivable. They can give discount or they could offer some of their more unique plants to the preferred customers before they let anyone else have the opportunity to buy them.

• Taking a loan: Although they’re adamant to maintain financial responsibility. The cash problem with the company would drain the business if the solution is not...