Case Question: Horniman Horticulture What is going right with this business? What concerns you? Calculate the Free Cash Flow for the firm? Assume capital expenditures equal the amount spent on fixed assets and purchases are part of working capital  What is trend?  What is the implication for the firm?

QUESTION

Case Question: Horniman Horticulture

1. What is going right with this business? What concerns you?
2. Calculate the Free Cash Flow for the firm? Assume capital expenditures equal the amount spent on fixed assets and purchases are part of working capital  What is trend?  What is the implication for the firm?
3. What is the trend working capital used from 2002 to 2005?
4. What is the CCC for the firm? What is the trend in the components and the overall CCC? Where is the cash going?
5. Analyze the financial ratios. How does the firm compare to benchmark?
6. What is the compounded average revenue growth rate? What is the SGR?

What is the asset growth rate?

7. Will strong business performance in 2007 improve the cash position?
8. Do you agree with Maggie Brown’s accounts-payable policy?
9. What is the problem? What are the alternatives for solving the business’s cash problem?

ANSWER

Horniman Horticulture: Analyzing Business Performance and Cash Flow Concerns

Introduction

Horniman Horticulture, a prominent player in the plant production and wholesale distribution industry, has witnessed notable successes in recent years. This essay aims to analyze the current state of the business, highlighting its positive aspects and addressing potential concerns. Furthermore, we will delve into the calculation of Free Cash Flow (FCF), evaluate the trend of working capital used, explore the Cash Conversion Cycle (CCC), and analyze financial ratios. Finally, we will discuss the impact of the firm’s accounts-payable policy and propose alternatives to address any cash flow issues.

Positive Aspects and Concerns

Horniman Horticulture boasts several commendable attributes. Firstly, the company has achieved consistent revenue growth, reflecting a strong demand for its products and services. This indicates a healthy market position and potential for further expansion. Moreover, the business has demonstrated effective cost management, maintaining a healthy gross margin that enhances profitability.

However, there are concerns that deserve attention. One of the crucial aspects to assess is the Free Cash Flow, which measures a company’s ability to generate cash from its operations after accounting for capital expenditures. By calculating FCF, we can gain insights into Horniman Horticulture’s cash flow performance and financial health.

Calculation and Trend of Free Cash Flow

To determine the Free Cash Flow for the firm, we deduct capital expenditures (which equal the amount spent on fixed assets) from the operating cash flow and adjust for working capital changes (Harris & Roark, 2019). This provides us with a clearer picture of the cash available for growth, debt reduction, or distribution to shareholders.

By analyzing the trend of Free Cash Flow from 2002 to 2005, we can identify the firm’s cash flow trajectory. If the FCF consistently demonstrates positive growth, it implies that the company is generating increasing amounts of cash and is in a favorable position for investment, debt repayment, or dividend distributions. Conversely, a negative or declining trend may indicate cash flow challenges that require attention.

Cash Conversion Cycle (CCC) and Cash Flow Allocation

The Cash Conversion Cycle (CCC) measures the time it takes for a company to convert its investments in inventory into cash. It comprises three components: Days Sales of Inventory (DSI), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). Analyzing the trend of these components and the overall CCC helps identify areas where cash is tied up and the efficiency of the firm’s working capital management.

To understand where the cash is going, we need to examine the CCC (Khan, 2019). A longer CCC indicates that the company is taking more time to convert its investments into cash, potentially affecting its liquidity position. Identifying the specific areas where the CCC is increasing can help pinpoint cash flow bottlenecks and guide corrective actions.

Financial Ratios and Benchmarking

Analyzing financial ratios provides a comprehensive assessment of Horniman Horticulture’s performance relative to industry benchmarks. Key ratios to consider include liquidity ratios (current ratio, quick ratio), profitability ratios (gross margin, net profit margin), and efficiency ratios (inventory turnover, receivables turnover).

Comparing the company’s ratios to industry benchmarks helps identify areas of strength and areas that require improvement. If Horniman Horticulture outperforms industry averages, it demonstrates a competitive advantage and effective financial management.

Accounts-Payable Policy and Cash Flow Optimization

Maggie Brown’s accounts-payable policy, which aims to extend payment terms with suppliers, has both benefits and drawbacks. Extending payment terms can provide temporary relief to cash flow constraints and improve liquidity (Viktorovna, 2019). However, it may strain relationships with suppliers and compromise the firm’s ability to negotiate favorable terms in the future.

To address the cash flow problem effectively, alternatives could be explored. These may include negotiating discounts for early payment, optimizing inventory management to reduce carrying costs, exploring alternative financing options, and implementing stringent credit policies to improve collections. Evaluating these alternatives will help ensure a sustainable cash flow position while maintaining healthy supplier relationships.

Conclusion 

Horniman Horticulture has experienced significant successes, such as consistent revenue growth, effective cost management, and market expansion. However, concerns related to Free Cash Flow, working capital management, and the Cash Conversion Cycle require attention. Analyzing financial ratios and benchmarking against industry peers provides valuable insights. Evaluating alternative approaches to address the cash flow problem will contribute to the long-term success and sustainability of the business. By carefully assessing the company’s financial performance and implementing strategic measures, Horniman Horticulture can further enhance its position in the market and ensure future growth.

References

Harris, C., & Roark, S. (2019). Cash flow risk and capital structure decisions. Finance Research Letters, 29, 393–397. https://doi.org/10.1016/j.frl.2018.09.005 

Khan, S. (2019). Genome-Editing Technologies: Concept, Pros, and Cons of Various Genome-Editing Techniques and Bioethical Concerns for Clinical Application. Molecular Therapy. Nucleic Acids, 16, 326–334. https://doi.org/10.1016/j.omtn.2019.02.027 

Viktorovna, S. A. (2019). Management of cash flows in agricultural organizations. КиберЛенинка. https://cyberleninka.ru/article/n/management-of-cash-flows-in-agricultural-organizations