Horniman Horticulture Finance: Analysis of Cash-Flow and Working Capital Problems

This case study analyzes the cash-flow and working capital problems faced by Horniman Horticulture. It discusses the relevance of free cash flow, financial ratios, and working capital management. The article also includes a summary of the financial statements and graphs of free cash flow and working capital trends.

Running head: HORNIMAN HORTICULTURE FINANCE 1
Horniman Horticulture
Date
Institution

HORNIMAN HORTICULTURE FINANCE 2
Introduction
The Horniman horticulture case involves the analysis of the cash-flow and working
capital problems in management that usually affect the small and growing enterprises. Under the
circumstances, the three-year operational period of the Horniman horticulture by Bob and
Maggie Brown ended in 2005, after making revenue of $ 1 million just within central Virginia.
Amidst the booming business as demands of the products goes higher that had sustainable
margins, the two managers, Bob and Maggie Brown, who were also couples, were also
experiencing the cash balancing problem. It is also important to note that the case gives more
insight into the difference that exists between the accounting profit and the cash flow. More than
that, it gives highlights into the negative effects that are common with the growth of the cash
flow. Effectively, through the case, an established forum that appreciates the relevance of the
free cash flow to business owners and the managers are given as well as introducing the aspects
of financial ratios. Lastly, the case gives more relevance to the development of the concepts of
cash cycles as well as the management of the working-capital to motivate the various concepts of
finance.
The Free Cash Flow of the Firm
According to Adame, et al. (2018), free cash flow is the cash left over after the firm has
made payments to its operating expenses as well as the capital expenditures. The free cash flow
is significant in determining the cash might of the company after funding all its operational and
capital expenses when measured regarding paying dividends and shareholders.
Free cash flow= Operating cash flow-capital expenditures

HORNIMAN HORTICULTURE FINANCE 3
The table below shows the four-year period summary of the Horniman horticulture financial
statement, from 2002 to 2005 (Schill, 2017).
HORNIMAN HORTICULTURE
The Projected Horniman Horticulture Financial Summary (in thousands of dollars)
2002 2003 2004 2005
Profit and loss statement
Revenue 788.5 807.6 908.2 1048.8
Cost of goods sold 402.9 428.8 437.7 503.4
Gross profit 385.6 378.8 470.5 545.4
SG&A expense 301.2 302.0 356.0 404.5
Depreciation 34.2 38.4 36.3 40.9
Operating profit 50.2 38.4 78.2 100.0
Taxes 17.6 13.1 26.2 39.2
Net profit 32.6 25.3 52.0 60.8
Balance sheet
Cash 120.1 105.2 66.8 9.4
Accounts receivable 90.6 99.5 119.5 146.4
Inventory 468.3 507.6 523.4 656.9
Other current assets 20.9 19.3 22.6 20.9
Current assets 699.9 731.6 732.3 833.6
Net fixed assets 332.1 332.5 384.3 347.9
Total assets 1032.0 1064.1 1116.6 1181.5
Accounts payable 6.0 5.3 4.5 5.0
Wages payable 19.7 22.0 22.1 24.4
Other payables 10.2 15.4 16.6 17.9
Current liabilities 35.9 42.7 43.2 47.3
Net worth 996.1 1021.4 1073.4 1134.2
Capital expenditure 22.0 38.8 88.1 4.5
Purchases 140.8 145.2 161.2 185.1
Free cash flow= Operating cash flow-capital expenditures
For year 2002 (thousands of dollars)= 32.6-22 =10.6

HORNIMAN HORTICULTURE FINANCE 4
2003=25.3-38.8 = (13.5)
2004 = 52.8-88.1 =(35.3)
2005 =60.8-4.5 = 56.3
A graph of free cash flow for the company
The working capital Trend
According to the analysis of Filbeck, et al. (2017), the working capital is the current
assets, which is calculated by deducting the current liability from the current assets. It is
important to note that the working capital management is critical in the management of
inventories, accounts receivable and payable as well as cash management.
Working capital = Current assets-current liabilities
Based on the excel spreadsheet above, Working capital for the periods, 2002 to 2005 are as
stated above:

HORNIMAN HORTICULTURE FINANCE 5
2002=699.9-35.9 = 664
2003=731.6 – 42.7 = 688.9
2004=732.3 – 43.2 =689.1
2005=833.6 – 74.3 =759.3
The graph of the working capital
Based on the graph, it illustrated that the company had had increasing working capital,
suggesting the company has been successful in the management of inventories, accounts
receivable and payable as well as cash management.
The financial Ratios analysis
The analysis of the financial ratios is the quantitative analysis of the financial statements of a
company. Based on the spreadsheet of the financial ratios analysis and benchmark of Horniman
Horticulture, the financial ratios are as shown (Schill, 2017) :

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HORNIMAN HORTICULTURE
Financial Ratio Analysis and Benchmarking
2002 2003 2004 2005 Benchmark
Revenue growth 2.9% 2.4% 12.5% 15.5% (1.8)%
Gross margin (Gross profit / Revenue) 48.9%
46.9
% 51.8% 52.0% 48.9%
Operating margin (Op. profit / Revenue) 6.4% 4.8% 8.6% 9.5% 7.6%
Net profit margin (Net profit / Revenue) 4.1% 3.1% 5.7% 5.8% 2.8%
Return on assets (Net profit / Total assets) 3.2% 2.4% 4.7% 5.1% 2.9%
Return on capital (Net profit / Total capital) 3.3% 2.5% 4.8% 5.4% 4.0%
Receivable days (AR / Revenue * 365) 41.9 45.0 48.0 50.9 21.8
Inventory days (Inventory / COGS * 365) 424.2 432.1 436.5 476.3 386.3
Payable days (AP / Purchases * 365) 15.6 13.3 10.2 9.9 26.9
NFA turnover (Revenue / NFA)
2.
4
2
.4
2
.4
3
.0 2.7
Financial ratio analysis
The 2002-2005 ratio analysis:
Pie chart showing the Financial ratios Benchmark of the company

HORNIMAN HORTICULTURE FINANCE 7
According to the two pie charts, in the comparison between the analysis of the ratios and their
benchmarks, it is evidenced that the net profit margin has the highest benchmarks across the four
years followed by the revenue growth and the operating margin/revenue/ profit. Gross margin is
also high among the financial ratios of 2002 to 2005 compared to other financial ratios in the
same period.
The compounded average revenue growth
The compound annual growth rate is the value of investment at the end of the financial
period divided by the value of the investment before the financial period raised to the power of
one divided by the period length, and subtract one from the subsequent result.
Based on the analysis, the CAGR of the firm increases with time, from 125.36 to 659.5,
suggesting a better measure of growth overtime for the company.

HORNIMAN HORTICULTURE FINANCE 8
In conclusion, despite the financial challenges of the cash flow, Bob’s optimism made him to
thoroughly enjoy running the company’s business operations and was very critical on the growth
during the three fiscal years before 2005.

HORNIMAN HORTICULTURE FINANCE 9
References
Adame, K., Koski, J. L., & McVay, S. E. (2018). Free Cash Flow Disclosure in Earnings
Announcements.
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital
management, corporate performance, and financial constraints. Journal of Business
Research, 67(3), 332-338.
Filbeck, G., Zhao, X., & Knoll, R. (2017). An analysis of working capital efficiency and
shareholder return. Review of Quantitative Finance and Accounting, 48(1), 265-288.
Nobanee, H., & Abraham, J. (2017). The Impact of Free Cash Flow, Equity Concentration and
Agency Costs on Firm's Profitability.
Schill, M. J., & Schill, M. J. (2017). Horniman Horticulture. Darden Business Publishing Cases,
1-5.
.