Horniman Horticulture Case Study Solution

Alternative solutions
After analyzing all the situations with the help of stated facts and figures, following alternatives
solutions are suggested for Horniman Horticulture to cope up with this critical low cash balance
and working capital requirements:

Alternative solution #1 (Credit Line Facility)

The First alternative solution suggests that Horniman Horticulture should utilize its credit line
facility to cope up with required cash balance requirements, which will help the company to run
its operation smoothly. This credit lines facility provide helps to management to above stated
issue resolve of shortage of cash and pay the accounts by utilizing short term loans and short-
term notes. But on the other hand, credit line requires to pay interest expense and there is threat
that company might not be able to pay its interest expense because of unexpected adverse
weather.

Alternative solution #2(Credit Discount Model)

The second alternative solution suggests that the company should formulate a flexible credit
discount model to attract more customers with flexible credit term. This will eventually help the
company to increase its revenues and will result in early cash recovery. Moreover, the business
should try to recover the accounts receivables early through giving cash discounts and keeping
the follow up for customer management.

Alternative solution # 3 (Expansion in Business for

Attracting More Customers)
The third alternative solution is that the company should expand its operations globally or to
attract potential neighboring countries for generating more revenues which help the company to
meet its cash requirements. This solution requires huge investment which will only be meet by
acquiring long term heavy loans.For this, Horniman Horticulture have to apply mass marketing
strategy that will also require huge cash investments. (See appendix 5 for pros & cons associated
with each suggested alternatives)

Recommendations
After the thorough analysis of the present case it is recommended to Mr. and Mrs. Bob for
managing their working capital, they should introduce flexible credit policy to its customers for
on time recovery of its cash.The business should try to recover the accounts receivables early
through giving cash discounts and keeping the follow up for customer management. The
business can also use the facility of discounting accounts receivables to meet the cash
requirements.
It is further recommended that the Bobs should consider, decreasing in the inventory turnover
days, this will help in satisfying their customers and to attract more customers to charge premium
price. Formulation of effective credit policy will require expert guidance along with skilled
Labors.

Conclusion
Horniman Horticulture is a small wholesale nursery business experiencing a tremendous growth
rate and an expected increase in demand in the upcoming years. Besides all this success, the
business is facing some financial troubles specially in managing the working capital. The
business has the strategy of no debt financing. Maggie suggest zero debt policy because of the
company’s critical cash balance along with considering the effect of adverse weather. It is
recommended to take short term loan to meet the cash issues and encourage customers to pay the
accounts receivables early by giving them cash discounts.
Appendix: 1(SWOT Analysis)
Strengths
·         Increased revenues
·         Experienced and specialized owner
·         52 greenhouses and 40 acres of productive fields
·         Good team specialized in woody shrubs
·         plant species increase by 40%
·         premium price charged
Opportunities
·         Growing demand for more mature plants.
·         top-line expansion
·         Growing market demand
·         30% growth rate
Weakness
·         Working capital problems
·         Low cash balance of 10,000
·         Not using debt policy
·         Increase in receivables and inventory days
·         Decreased payable periods
 
Threats
·         Debt policy
·         Rivalry competitors
·         Failure of suggested strategies
·         Interest payment
·         Rising of wage and interest rate
·         Adverse weather
Appendices
Appendix: 2(Projected Income Statement)
HORNIMAN HORTICULTURE
Profit and loss statement 2015 2015E
Revenue 15.48% 1211.167 30% 1363.44
  Cost of goods sold 15.01% 578.9618 534.4195
Gross profit 15.92% 632.2048 52% 829.0205
SG&A expense 13.62% 459.6074 459.6074
Depreciation 12.67% 46.08292 46.08292
  Operating profit 27.88% 126.5144 323.3301
Taxes 49.62% 58.65038 58.65038
  Net profit 16.92% 67.86403 264.6797

Appendix: 3 (Projected Balance Sheet)

HORNIMAN HORTICULTURE
Balance sheet 2015E
Cash -87.8412
Accounts receivable 23% 179.3553
Inventory1 26% 824.4509
Other current assets2 -8% 19.32788
  Current assets 935.2929
Net fixed assets3 -9% 314.9477
  Total assets 620.3451
Accounts payable 11% 5.555556
Wages payable 10% 26.93937
Other payables 8% 19.30181
  Current liabilities 51.79673
  Net worth 6% 1198.444
Capital expenditure -95% 0.229852
Purchases4 15% 212.5435
NWC 883.5
Receivable days (AR / Revenue * 365) 48.01435
Inventory days (Inventory / COGS * 365) 563.0868
Payable days (AP / Purchases * 365) 9.540531
CASH CONVERSION CYCLE 601.5606

Appendix: 4 (Financial Ratio Analysis)

HORNIMAN HORTICULTURE
Financial Ratio Analysis and Benchmarking
2012 2013 2014 2015     Benchmark1
 
Revenue growth 2.9% 2.4% 12.5% 15.5% 30% (1.8)%
Gross margin (Gross profit /
48.9% 46.9% 51.8% 52.0% 61% 48.9%
Revenue)
Operating margin (Op. profit /
6.4% 4.8% 8.6% 9.5% 24% 7.6%
Revenue)
Net profit margin (Net profit /
4.1% 3.1% 5.7% 5.8% 2.8%
Revenue)
Return on assets (Net profit /
3.2% 2.4% 4.7% 5.1% 43% 2.9%
Total assets)
Return on capital (Net profit /
3.3% 2.5% 4.8% 5.4% 22% 4.0%
Total capital)
Receivable days (AR /
41.9 45.0 48.0 50.9 48.01 21.8
Revenue * 365)
Inventory days (Inventory /
424.2 432.1 436.5 476.3 563.09 386.3
COGS * 365)
Payable days (AP / Purchases *
15.6 13.3 10.2 9.9 9.54 26.9
365)
NFA turnover (Revenue /        2.4               2.4        4.3 2.7
NFA) 2.4 3.0
883.496
NWC 664 688.9 689.1 786.3
1
CASH CONVERSION
450.6 463.7 474.3 517.4 601.6
CYCLE
Appendix: 5 (Pros & Cons of Proposed Alternatives)
Alternative Solutions Pros Cons
·         Cash requirements fulfil
Alternative Solution #1: ·         Working capital run smoothly ·         Unable to pay interest expense
Credit Line Facility ·         Extreme weather
·         Rapid cash conversion cycle

·         Attract more customers

·         Flexible credit terms ·         Decreased revenues because of
Alternative Solution #2: offered discount
Credit Discount Model ·         Rapid recovery of account ·         Different credit terms
receivable

·         Attract more customers

·         Discovering untouched markets ·         Heavy investment
Alternative Solution#3: ·         Shrinking cash structure
·         Mass advertisement
Expansion in Business for ·         More skilled knowledge
Attracting More Customers ·         Increased revenues
·         More Laboure required
·         Global intensive brand