Case 9 Horniman Horticulture 1. The financial performance of a company can be determined by analyzing different financial ratios. The Horniman’s company financial performance looks strong and healthy if one looks at their 2005-projected financial summary net profit of 60. 8 thousand dollars. Also they have a steady growth and increase from 2002 to 2004 in their revenue, profits and assets. In addition, Exhibit 2 demonstrates that all but one financial ratio supersede the benchmark for other horticultural producers.
However, someone like Warren Buffet might look at their cash flow balance and determine that the financial performance of the company is poor. A company may seem profitable on paper but may not have liquidity due to low cash balance. A company must realize that there is a difference between cash flow and accounting profits. In the case of the Horniman’s the financial performance appears healthy but they do not have enough cash flow to liquidate their liabilities. 2. Horniman is growing at a fast pace; therefore, it has a negative effect on cash flow because they are purchasing supplies, inventory and additional land.
Maggie usually pays her suppliers in 10 days for a 2% discount and they are not going to finance the purchase of the land because of an interest rate of 6. 5%. However, Maggie should not be so rigid with her accounts payable policy, she should allow for some cash to accumulate before she sends out her payments. In addition, Maggie needs to determine her opportunity costs of whether the 2% discount is worth her making payments in 10 days rather than waiting the 30 days. In addition, Maggie should consider financing the purchase of the land.
If she has a healthy cash flow she can demonstrate to the bank that they are a low risk investment and may even get a better interest rate on a loan. 3. The erosion of their cash balance can be explained by two factors. First, by looking at the accounts receivable section of their balance sheet in Exhibit 1. It shows that their receivables keep increasing from year to year. Which means that they are not collecting payments (cash) from their customers or buyers fast enough or are allowing for a very long payment term.
If the Horniman’s wanted to increase their cash, they can implement a shorter 30-day payment policy or a discount for payments made within 10 days. Secondly, their inventory turnover is too low. This means that they are purchasing too much inventory and not selling it fast enough. They are carrying over too much inventory, which also incurs additional costs to the company. Therefore, the Horniman’s do not have a good sales forecast model because they are assuming that they are going to sell everything they have.
In fact, in Exhibit 2, the Inventory day’s ratio is the only ration in which the company underperforms compared to the industry benchmark. Part of the reason is because Bob is investing in growing specimens that take years to mature so this inventory is not able to be sold for a couple of years which affects their inventory turn over. The combination of not collecting their receivables fast enough and purchasing too much inventory with cash and not selling it fast is eroding the Horniman’s cash balance.