UV8024

Rev. Nov. 15, 2022

Nelson Nurseries

Roger Barton hummed along to a seasonal carol on the van radio as he made his way over the dark and icy
roads of Amherst County, Virginia. He and his crew had just finished securing their nursery against some
unexpected chilly weather. It was Christmas Eve 2019, and Roger, the father of four boys ranging in age from
5 to 10, was anxious to be home. Despite the late hour, he fully anticipated the hoopla that would greet him on
his return and knew that it would be some time before even the youngest would be asleep. He regretted that
the boys’ holiday gifts would not be substantial; money was tight again this year. Nonetheless, Roger was
delighted with what his company had accomplished. Business was booming. Revenue for 2019 was 15% ahead
of 2018, and operating profits were up even more.

Roger had been raised to value a strong work ethic. His father had worked his way up through the ranks
to become foreman of a lumber mill in southwest Virginia. At a young age, Roger began working for his father
at the mill. After earning a degree in agricultural economics at Virginia Tech, he married Christine Nelson in
2007. Upon his return to the mill, Roger was made a supervisor. He excelled at his job and was highly respected
by everyone at the mill. In 2014, facing the financial needs of an expanding family, he and Christine began
exploring employment alternatives. In late 2016, Christine’s father offered to sell the couple his wholesale
nursery business, Nelson Nurseries, near Lynchburg, Virginia. The business and the opportunity to be near
Christine’s family appealed to both Christine and Roger. Pooling their savings, the proceeds from the sale of
their house, a minority-business-development grant, and a sizable personal loan from Christine’s father, the
Bartons purchased the business. They agreed that Roger would run the nursery’s operations and Christine
would oversee its finances.

Roger thoroughly enjoyed running his own business and was proud of its growth over the previous three
years. The nursery’s operations filled 52 greenhouses and 40 acres of productive fields, and the business
employed 12 full-time and 15 seasonal employees. Sales were primarily to retail nurseries throughout the mid-
Atlantic region. The company specialized in such woody shrubs as azaleas, camellias, hydrangeas, and
rhododendrons, but it also grew and sold a wide variety of annuals, perennials, and trees. Over the previous
two years, Roger had increased the number of plant species grown at the nursery by more than 40%. Nelson
Nurseries had recently experienced a noticeable increase in business from small nurseries. Because the cost of
carrying inventory was particularly burdensome for those customers, slight improvements in the credit terms
had been accompanied by substantial increases in sales.

Roger was a “people person.” His warm personality endeared him to customers and employees alike. With
Christine’s help, he kept a tight rein on costs. The effect on the business’s profits was obvious, as its profit
margin had increased from 3.1% in 2017 to an expected 5.8% in 2019. Roger was confident that the nursery’s
overall prospects were robust.

This fictional case was prepared by Michael J. Schill, Sponsors Professor of Business Administration. It was written as a basis for class discussion rather
than to illustrate effective or ineffective handling of an administrative situation. Copyright  2020 by the University of Virginia Darden School
Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to sales@dardenbusinesspublishing.com. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without
the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to
editorial@dardenbusinesspublishing.com.

This document is authorized for use only in Dr. Chandan Dasgupta, Dr. Durgesh Tinaikar, Dr. Mayank Joshipura, Dr. Nehal Joshipura, , Dr. Samveg Patel, Dr. Sangeeta Wats, Dr. Sudhanshu
Pani, Prof. Tarun Kehair's Corporate Finance: at Narsee Monjee Institute of Management Studies (NMIMS) from Nov 2023 to May 2024.
 Page 2 UV8024

With Roger running the business full-time, Christine focused on attending to the needs of their active
family and, with the help of two clerks, oversaw the company’s books. Roger knew that Christine was concerned
about the recent decline in the firm’s cash balance to below $10,000. Such a cash level was well under her
operating target of 8% of annual revenue. But Christine had shown determination to maintain financial
responsibility by avoiding bank borrowing and by paying suppliers early enough to obtain any trade discounts.
Most of Nelson’s suppliers provided 30-day payment terms, with a 2% discount for payments received on
purchases within 10 days. Her aversion to debt financing stemmed from her concern about inventory risk. She
believed that interest payments might be impossible to meet if adverse weather wiped out their inventory.

Christine was happy with the steady margin improvements the business had experienced. Some of the gains
were due to Roger’s response to a growing demand for more-mature plants. Nurseries were willing to pay
premium prices for plants that delivered “instant landscape,” and Roger was increasingly shifting the product
mix to that line. Christine had recently prepared what she expected to be the end-of-year financial summary
(Exhibit 1). As compensation for the Bartons’ services to the business, they had drawn an annual salary of
$50,000 (itemized as a selling, general, and administrative [SG&A] expense) for each of the previous three years.
This amount was effectively the family’s entire income. To benchmark the company’s performance, Christine
had used available data for the few publicly traded horticultural producers (Exhibit 2).

Roger and Christine agreed that market demand for their business was strong. They also knew that
expectations could change quickly. Increases in interest rates, for example, could substantially slow market
demand. The company’s margins relied heavily on the hourly wage rate of $10.32, currently required for H2A-
certified nonimmigrant foreign agricultural workers. There was some debate within the US Congress about the
merits of raising this rate.

Roger was optimistic about the coming year. Given the ongoing strength of the local economy, he expected
to have plenty of demand to continue to grow the business. Because much of the inventory took two to five
years to mature sufficiently to sell, his top-line expansion efforts had been in the works for some time. Roger
was sure that 2020 would be a banner year, with expected revenue hitting a record 30% growth rate. In addition,
he looked forward to ensuring long-term growth opportunities by buying a neighboring 12-acre parcel of
farmland, on which he expected to close next month. With the acquisition of the additional property, Christine
expected 2020 capital expenditures to be $75,000. Although she was not planning to finance the purchase,
prevailing mortgage rates were running at 6.5%. The expected depreciation expense for 2020 was $46,000.

But for now, it was Christmas Eve, and Roger was looking forward to taking off work for the entire week.
He would enjoy spending time with Christine and the boys. They had much to celebrate for 2019 and much to
look forward to in 2020.

This document is authorized for use only in Dr. Chandan Dasgupta, Dr. Durgesh Tinaikar, Dr. Mayank Joshipura, Dr. Nehal Joshipura, , Dr. Samveg Patel, Dr. Sangeeta Wats, Dr. Sudhanshu
Pani, Prof. Tarun Kehair's Corporate Finance: at Narsee Monjee Institute of Management Studies (NMIMS) from Nov 2023 to May 2024.
 Page 3 UV8024

Exhibit 1
Nelson Nurseries
Projected Financial Summary for Nelson Nurseries (in thousands of dollars)

2016 2017 2018 2019

Profit and Loss Statement
Revenue 788.5 807.6 908.2 1,048.8
Cost of goods sold 402.9 428.8 437.7 503.4
Gross profit 385.6 378.8 470.5 545.4
SG&A expense 301.2 302.0 356.0 404.5
Depreciation 34.2 38.4 36.3 40.9
Operating profit 50.2 38.4 78.2 100.0
Taxes 17.6 13.1 26.2 39.2
Net profit 32.6 25.3 52.0 60.8

Balance Sheet
Cash 120.1 105.2 66.8 9.4
Accounts receivable 90.6 99.5 119.5 146.4
Inventory1 468.3 507.6 523.4 656.9
Other current assets2 20.9 19.3 22.6 20.9
Current assets 699.9 731.6 732.3 833.6
Net fixed assets3 332.1 332.5 384.3 347.9
Total assets 1,032.0 1,064.1 1,116.6 1,181.5

Accounts payable 6.0 5.3 4.5 5.0

Wages payable 19.7 22.0 22.1 24.4
Other payables 10.2 15.4 16.6 17.9
Current liabilities 35.9 42.7 43.2 47.3
Net worth 996.1 1,021.4 1,073.4 1,134.2

Capital expenditure 22.0 38.8 88.1 4.5

Purchases4 140.8 145.2 161.2 185.1
Source: All exhibits created by author.

1 Inventory investment was valued at the lower of cost or market. The cost of inventory was determined by accumulating the costs associated with

preparing the plants for sale. Costs that were typically capitalized as inventory included direct labor, materials (soil, water, containers, stakes, labels, and
chemicals), scrap, and overhead.
2 Other current assets included consigned inventory, prepaid expenses, and assets held for sale.
3 Net fixed assets included land, buildings and improvements, equipment, and software.
4 Purchases represented the annual amount paid to suppliers.

This document is authorized for use only in Dr. Chandan Dasgupta, Dr. Durgesh Tinaikar, Dr. Mayank Joshipura, Dr. Nehal Joshipura, , Dr. Samveg Patel, Dr. Sangeeta Wats, Dr. Sudhanshu
Pani, Prof. Tarun Kehair's Corporate Finance: at Narsee Monjee Institute of Management Studies (NMIMS) from Nov 2023 to May 2024.
 Page 4 UV8024

Exhibit 2
Nelson Nurseries
Financial Ratio Analysis of Nelson Nurseries and Benchmarking

2016 2017 2018 2019 Benchmark1

Revenue growth 2.9% 2.4% 12.5% 15.5% (1.8)%

Gross margin
(gross profit / revenue) 48.9% 46.9% 51.8% 52.0% 48.9%

Operating margin
(operating profit / revenue) 6.4% 4.8% 8.6% 9.5% 7.6%

Net profit margin

(net profit / revenue) 4.1% 3.1% 5.7% 5.8% 2.8%

Return on assets
(net profit / total assets) 3.2% 2.4% 4.7% 5.1% 2.9%

Return on capital
(net profit / total capital) 3.3% 2.5% 4.8% 5.4% 4.0%

Receivable days
(accounts receivable [AR] / revenue × 365) 41.9 45.0 48.0 50.9 21.8

Inventory days
(inventory / cost of goods sold [COGS] × 365) 424.2 432.1 436.5 476.3 386.3

Payable days
(accounts payable [AP] / purchases × 365) 15.6 13.3 10.2 9.9 26.9

Net fixed assets (NFA) turnover

(revenue / NFA) 2.4 2.4 2.4 3.0 2.7

1 Benchmark figures were based on 2018 and 2019 financial ratios of publicly traded horticultural producers.

This document is authorized for use only in Dr. Chandan Dasgupta, Dr. Durgesh Tinaikar, Dr. Mayank Joshipura, Dr. Nehal Joshipura, , Dr. Samveg Patel, Dr. Sangeeta Wats, Dr. Sudhanshu
Pani, Prof. Tarun Kehair's Corporate Finance: at Narsee Monjee Institute of Management Studies (NMIMS) from Nov 2023 to May 2024.