Case 9: Horniman Horticulture Essay

1. Strengths Profitability Ratios Constant growth from 2002-05, particularly year 2004 and 2005 with impressive growth in revenue with12.5% and 15.5% respectively, much high than the benchmark just -1.8%. Gross, operating and net salary margin were all per stooling better than the benchmarks. Management Co-owner Bob Brown has been brought up to value a strong work ethic, which he has obtained through his father since at young age by working for his father at the mill. After finishing his study, he returned to the mill and excelled at his job (supervisor) and was highly respected. Bob was a people person, his warm personality made beloved by all customers and employees.Weaknesses bodily function Ratios apportions increasingly time to receive stipends from sales 51 days year 2005 (far exceeded the benchmark 22 days). Days of register on pass (476 days) has been increased piecemeal much higher than the benchmark (386 days). Payables turnover (10 days) is too short comp ared wi th the benchmark (27 days) and slowly declined as years pass by. Liquidity problems seen through immediate payment on hand kept decreasing since 2002 and sharply reduced in 2005 probably resulted from the issue that quick dues and slow receivables happened simultaneously every year. Since 2005, they had not reach their direct balance of 8% cash over total revenue (fell to 0.9% 2005)2. Free cash flow to the owners of the plastered (FCFE) for 2005FCFE = Operating Cash Flow Change in loot Working Capital Change in InvestmentsOperating profit 100.0 Taxes 39.2 + Depreciation 40.9 Operating cash flow 101.7 Capital expenditure (4.5) Increase in NWC (156.3) Increase in CA 803.3 642.9 = 160.4 - Increase in CL 47.3 43.2 = (4.1) Free cash flow (59.10) Cash cycle of the cable for 2005CCC = Days history Outstanding (DIO) + Days Sales Outstanding (DSO) Days Payables Outstanding (DPO)= 476 + 51 10 = 517 (days)Using cash Even though HH had rapidly increased gr oss profit, operating profit and net profit since 2002, the signs cash balance had massively declined from $120,100 (2002) to $9,400 (2005). Increasing in inventory as extending property by 12-acres, with an expected capital expenditure of $75,000 in 2006, HH has also increased their product range by 40%. Therefore cash has been used a exercise set in this period. The firms credit terms have been improved as HH offers longer payment periods for customer (DSO of 51 days), firms payment of purchases within 10 days (DPO) to receive a 2% discount, this shows that HH is making payments five times faster than receiving them. DIO is also a concern that HH has a hand in, HH is choosing to focus on much maturing plants, therefore its inventory will naturally be longer than the benchmark, in fact, HHs lowest end was still 10% over the benchmark.3. The growth trend would be expected to be stronger in 2006. However the cash deficit is still a significant issue fall out-of-pocket to both ca pital expenditure and working capital would be further increased in order to maintain the subscriber line expansion. Therefore, they need to work out some financial leverage to solve this problem.Projected Horniman Horticulture Financial Summary (in thousands of dollars) 2002 2003 2004 2005 2006E 20% Profit and loss statement Revenue 788.50 807.60 908.20 1048.80 1258.56 Cost of goods sold 402.90 428.80 437.70 503.40 630.49 51.10% 53.10% 48.19% 48.00% 50.10% fortune of Sales Gross profit 385.60 378.80 470.50 545.40 628.07 SG&A expense 301.20 302.00 356.00 404.50 482.53 38.20% 37.39% 39.20% 38.57% 38.34% Percentage of Sales Depreciation 34.20 38.40 36.30 40.90 37.45 Average over 4 years Operating profit 50.20 38.40 78.20 100.00 108.09 Taxes 17.60 13.10 26.20 39.20 42.37 35.06% 34.11% 33.50% 39.20% 39.20% quasi(prenominal) as year 2005 Net profit 32.60 25.30 52.00 60.80 65.72 Balance sheet Cash 120.10 105.20 66.80 9.4013.43 A ccounts receivable 90.60 99.50 119.50 146.40 160.24 11.49% 12.32% 13.16% 13.96% 12.73% Percentage of Sales Inventory 468.30 507.60 523.40 656.90 763.03 59.39% 62.85% 57.63% 62.63% 60.63% Percentage of Sales Other period assets 20.90 19.30 22.60 20.90 20.93 Average over 4 years Current assets 699.90 731.60 732.30 833.60 957.62 Net fixed assets 332.10 332.50 384.30 347.90 300.10 Total assets 1032.00 1064.10 1116.60 1181.50 1257.72 Accounts payable 6.00 5.30 4.50 5.00 5.20 Average over 4 years Wages payable 19.70 22.00 22.10 24.40 31.41 2.50% 2.72% 2.43% 2.33% 2.50% Percentage of Sales Other payables 10.20 15.40 16.60 17.90 21.19 1.29% 1.91% 1.83% 1.71% 1.68% Percentage of Sales Current liabilities 35.90 42.70 43.20 47.30 57.80 Net worth 996.10 1021.40 1073.40 1134.20 1199.92 Capital expenditure 22.00 38.80 88.10 4.50 75.00 Purchases 140.80 145.20 161.20 185.10 224.13 17.86% 17.98% 17.75% 17.65% 17.81% Percentage of Sales 4. The comp anys accounts-payable insurance Currently the firms DSO was 10 days (in order to receive a 2% discount), approx. 2.7 times as fast as the benchmark of 27 days. This policy is not suitable as their current credit terms offered to customer up to 51 days, which is double the benchmark. The firms net profit margin was 5.8% (the benchmark is just 2.8% 2005), so HH does not need to continuously make payment to suppliers early (adversely, HH should take advantage of the offered credit terms allowing firm 30 days to payback for purchased goods), and also HH will also reduce the credit terms even though the sales probably drops, which would leave more cash available for firm as well as the cash cycle will be shorter so that the business will avoid the inferior liquidity of the cash. If HH does not change the policy, in the long run, the shortage of cash may adversely influence the purchasing power and operating capacity of the business and further businesss profitability.5. What can the co mpany do to solve its cash problem? Offers discount payment terms (i.e. 2% discount if payments are received within 10 days) enable HH to collect cash immediately. Takes advantage of the offered credit terms (allow firm 30 days to payback the purchased goods) keeps more cash for operating activities in long-term period. Slows down the expansion pace to decrease the capital expenditure. Starts selling product ranges that are not instant landscape plants (as these take a long time to mature and also can eliminate some risks for keeping the plants for longer periods of time feature of this industry rely to a great extent on weather that is unpredictable) Raising funds starts financing through debt, also can receive thetax shield benefit on interest payments. Transforms business from sole proprietorship into partnership in effort of not only increasing cash available for business but also receiving contributions of property, labor and skills form partners.6. Calculate the sustainable growth of the company in 2005Sustainable growth = ROA x Leverage x Retention 5.36% ROA (Net profit / Total assets) 5.15% Leverage (Total Assets/Net Worth) 1.04 Retention (1- Dividend Payout ratio) 1.00 Economic profit = (ROA Cost of capital) x Total Assets -57.35 Cost of capital 10.00% Total Assets 1181.50 Net Worth 1134.20 The negative economic profit shows that the firm does not earn a sufficient return on capital. The firm is facing their dismissing take aim of cash and as a result, the negative cash level in the forthcoming years will be clearly observed. As shown above, the majority of the firms cash expenditure is held up in inventory (with cash cycle being 517 days compared with the benchmark of 381 days) and account receivables (due to the collection policy). The trade-off that company has to face is an increase in their credit terms. Even though this may reduce the sales volume, the company will probably avoid the risk involved with having a mo re mature product range.