This case illustrates the problems of cash flow and working-capital management that are typical for small, growing businesses. At the end of 2015, Bob and Maggie Brown have completed their third year of operating Horniman Horticulture (HH), a $1-million-revenue woody-shrub nursery in central Virginia. While experiencing strong demand and improved margins, the Browns are puzzled by their plummeting cash balance. The case highlights the difference between cash flow and accounting profits, as well as the common negative effects of growth on cash flow. It also motivates discussions about financial ratio analysis, the cash cycle, and working capital management; development of a financial model; and the relevance of free cash flow to business owners and managers.
Study Questions
Case Exhibit 1 summarizes HH financial statements for the past four years and Case Exhibit 2 provides selected financial ratios. What is your assessment of the recent financial performance of the business? How do HH ratios compare with the benchmarks prepared by Maggie, based on average data for publicly-traded horticultural producers? (LO 4, 5, 6)
What explains the erosion of the cash balance? (LO 6)
Do you agree with Maggie Browns accounts-payable policy? Before you answer, be sure to consider the information in footnote 2 on page 128. (LO 6)
Lets anticipate the financial position of the business in the next year of operation. Extend the financial statements through 2016, assuming (1) the expected revenue growth is 30%, as predicted by Bob Brown on page 129; (2) Depreciation expense and capital expenditures are $46,000 and $75,000, respectively, as estimated by Maggie Brown in footnote 4 on page 129; and (3) the percent of sales approach provides a reasonable forecast of all operating expenses, all current assets (except cash) and all current liabilities. The cash balance will be the amount required to plug the balance sheet (i.e. make it balance): Specifically, cash equals (Curr. liab. + Net worth) (Accounts receivable + Inventory + Other current assets + Net fixed assets). A negative cash balance implies that the Browns need to either seek external financing or scale down their business plan. (LO 7, 8, 9)
With a lower revenue growth target, would HH be able to avoid a cash deficiency? Discuss what other measures the Browns might take in order to approach the cash level that Maggie considers ideal, where the available cash is equal to 8% of revenue. (LO 9)
A Word file of this assignment is attached for your convenience, along with the Excel file of the Case Exhibits. In addition, a recorded demonstration of the suggested spreadsheet expansion to answer question 4 is available for your viewing. When you have completed your Excel and Word files, please save them as Yourlastname_case8 and submit to this dropbox.
Case 8_Horniman.xlsx
Case 8 Horniman StudyQs.docx
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