Overview: This is a presentation on Horniman Horticulture, we have devised a Naïve and Revised forecast to extrapolate out the income statement and balance sheet from 2016 to 2018. Our presentation outlines the difference between Profits and Cash. Horniman Horticulture had high profitability but their cash balance was decreasing year-over-year. Our Revised Forecast applies our assumptions to create manageable growth without addition financing through debt or equity.
Problem: Horniman Horticulture started with a cash balance $120,000 at the end of 2012, then decreased to $9,400 at the end 2015. Cash was eroding year-over-year with no signs of stopping as the naive forecast shows they will have a negative cash balance in 2016 through 2018.
Solution/Assumption: We discovered that Horniman Horticulture was growing to fast for the business to fund its operations without debt or equity. Their cash cycle was above industry average with high receivable days, low payable days, and high inventory days. We kept payable days constant as the firm gets a 2% discount from suppliers when paid under 10 days. We increased receivable days and inventory days as they go to a more mature plant which increase gross margin. The change in cash cycle decreases revenue growth from 30% to and controllable growth of 8.3%.
2. Outline
• Company Overview
• Problem
• Past Financial Analysis
• Brown’s Accounts-Payable Policy
• Cash Erosion
• Case Analysis (Assumptions)
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3. Overview
Wholesale Nursery
• Bob oversees operations
• Retail nurseries throughout
mid-Atlantic region
• 52 Greenhouses, 40 acres of
productive fields
• 12 full-time and 15 seasonal
employees
• Expanded the number of plant
species by more than 40%
Finances
• Maggie oversees finances
• Two clerks
• Focused on company’s books
and controllable growth
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4. Problem:
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1. Substantial revenue growth
2. Cash eroding year-over-year
• $120,100 in 2012 to 9,400 in 2015
3. Cash Cycle is working against Horniman
• Inventory days and Receivable days
5. Past Financial Performance:
Income Statement
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Profit Margin
(Increase)
Revenue Growth
(Increase)
Return on Asset
ROA
(Increase)
Return on Capital
ROC
(Increase)
Profitability
9. Cash Erosion: Free Cash Flow
Exhibit 2, 2013 to 2015 actuals
2016 to 2018 forecast
Exhibit 1, FCF with 8% cash balance
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10. Brown’s Accounts-Payable Policy
Policy (30-10)
• 30 days to pay supplier
• If paid in 10 days, you get a 2%
discount
● 2% is per period not annual
● Annualized savings return of
36.5%
Cost of Not Taking Discount
• Expected 2016 profit loss
● 2% x $240,600 (purchases)=
$4,800
• Expected capital increase
● Increase from $6,500 to
$19,700
• Cost of not taking discount
● $4,810/($19,700-$6,500)= 36%
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11. Recommendations
• Decrease in receivables
● Change the terms for customers to pay sooner
• Increase in Inventory days
● Switching to a more mature plant, the longer the inventory
days
• Gross margin increase
● Mature plants provide a better gross margin
• Decrease in revenue growth
● A decrease in receivables will slow growth
● A more mature plant will yield a higher price driving
customers to competitors for a lower price
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