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.
Appendices
Appendix: 1(SWOT Analysis)
| Strengths | Weakness |
| · 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 |
· Working capital problems
· Low cash balance of 10,000 · Not using debt policy · Increase in receivables and inventory days · Decreased payable periods
|
| Opportunities | Threats |
| · Growing demand for more mature plants.
· top-line expansion · Growing market demand · 30% growth rate |
· Debt policy
· Rivalry competitors · Failure of suggested strategies · Interest payment · Rising of wage and interest rate · Adverse weather |
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 / Revenue) | 48.9% | 46.9% | 51.8% | 52.0% | 61% | 48.9% | |
| Operating margin (Op. profit / Revenue) | 6.4% | 4.8% | 8.6% | 9.5% | 24% | 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% | 43% | 2.9% | |
| Return on capital (Net profit / Total capital) | 3.3% | 2.5% | 4.8% | 5.4% | 22% | 4.0% | |
| Receivable days (AR / Revenue * 365) | 41.9 | 45.0 | 48.0 | 50.9 | 48.01 | 21.8 | |
| Inventory days (Inventory / COGS * 365) | 424.2 | 432.1 | 436.5 | 476.3 | 563.09 | 386.3 | |
| Payable days (AP / Purchases * 365) | 15.6 | 13.3 | 10.2 | 9.9 | 9.54 | 26.9 | |
| NFA turnover (Revenue / NFA) | 2.4 | 2.4 | 2.4 | 3.0 | 4.3 | 2.7 | |
| NWC | 664 | 688.9 | 689.1 | 786.3 | 883.4961 | ||
| CASH CONVERSION CYCLE | 450.6 | 463.7 | 474.3 | 517.4 | 601.6 | ||
Appendix: 5 (Pros & Cons of Proposed Alternatives)
| Alternative Solutions | Pros | Cons |
| Alternative Solution #1: Credit Line Facility | · Cash requirements fulfil
· Working capital run smoothly · Rapid cash conversion cycle |
· Unable to pay interest expense
· Extreme weather |
| Alternative Solution #2: Credit Discount Model | · Attract more customers
· Flexible credit terms · Rapid recovery of account receivable |
· Decreased revenues because of offered discount
· Different credit terms |
| Alternative Solution#3: Expansion in Business for Attracting More Customers | · Attract more customers
· Discovering untouched markets · Mass advertisement · Increased revenues · Global intensive brand |
· Heavy investment
· Shrinking cash structure · More skilled knowledge · More Laboure required |
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