CASE STUDY ON HORNIMAN HORTICULTURE

SUMMARY

Maggie and Bob Brown purchased Horniman Horticulture from Maggie's parents in 2002 for

$999,000. They are both delighted that they chose to own their own business and have
done an excellent job maintaining it throughout its first three years. From 2003 to 2005,
Bob grew the number of plant species at the nursery by more than 40%, contributing to its
success. Maggie manages the nursery's finances. Additionally, Bob and his wife kept a tight
rein on costs, so they could keep the business profitable. The profit margin was 5.8% in
2005 and Bob was confident that with the success the local economy was
experiencing, a strong demand would sustain his business.
In 2005, he had been working on his expansion efforts for a while because much of his invent
ory takes two to five years to mature. He was optimistic that 2006 would be a banner year,
expecting his revenue to grow by 30%.He and Maggie also hoped to expand their business
by purchasing a 12-acre parcel of neighboring farmland at the end of 2005, ensuring their
long-term success.

PROBLEM

Despite a rapid growth in profits over their first few years, cash on hand has been

decreasing until in 2005, it was below their target level of 8% of annual revenue.
The result was a liquidity problem for the company, since most of their cash was tied up in
inventory and accounts receivables. It seems apparent, as well, that the unsustainable growth
rate was to blame for the company's depleting cash balance. Its impressive growth can be
attributed to its extensive investments in expanding its nursery, yet it had a cash balance of
less than $10,000 by the end of 2005. The goal of the company is to achieve sustainable
growth that does not decrease cash flow each year, but instead coincides with at least 8% of
their annual revenue. Maggie refuses to take a bank loan and refuses to finance the company
with debt in order to maintain financial responsibility. Even so, they are acting as a bank to
their customers as they offer such long payment periods. In order to receive all trade
discounts, they are making payments within 10 days, leaving the cash in accounts receivable
for an average of 51 days.

SOLUTION
Decrease accounts receivable days-The receivable days are calculated using the following
formula:Receivables/revenue*365

Collecting debts sooner would increase the cash balance and decrease accounts receivable.
Customers who have large orders or who pay early on accounts receivable are preferred
customers. The company can give discounts or they can offer some of their more unique
plants to preferred customers before letting anyone else have the chance to buy them.

Taking a loan- Although they insist on maintaining financial responsibility. In the absence of
a solution, the business would suffer and the company's growth would be hindered. To grow
and improve financially. In my opinion, they can successfully fund any loan. Their growth
rate is definitely higher than their loan repayment rate, and would help the company to be
more competitive.

Accounts payable-They should be the account payable to the account receivable, and they
should not pay until the money is received. This would allow them to function more
effectively while not draining their bank accounts. The Browns are making payments five
times faster than they are getting them, as seen by their ability to pay for purchases within a
10-day period and earn a 2% discount.

Merits and Demerits of possible solutions of the case:

The apparent merits of all of the above-mentioned solutions are to enhance the company's
cash situation while keeping up with its expansion.

Negative aspects:

Reduce accounts receivable days- Because the corporation expects the money sooner, it
would affect the customer's purchasing behaviour.It would result in a higher rate of consumer
switching, lowering client loyalty.

Taking a loan- The organisation would be burdened with additional debt payments and
interest, reducing margins.

Accounts payable- Trade discount would have to be given away. Negotiating strength with
suppliers is dwindling.