Horniman Horticulture Bob Brown hummed along to a seasonal carol on the van radio as he made his way over the dark and icy roads of Amherst County, Virginia. He and his crew had just finished securing their nursery against some unexpected chilly weather. It was Christmas Eve 2015, and Bob, the father of four boys ranging in age from 5 to 10, was anxious to be home. Despite the late hour, he fully anticipated the hoopla that would greet him on his return and knew that it would be some time before even the youngest would be asleep. He regretted that the boys' holiday gifts would not be substantial; money was again tight this year. Nonetheless, Bob was delighted with what his company had accomplished. Business was booming. Revenue for 2015 was 15% ahead of 2014, and operating profits were up even more. Bob had been brought up to value a strong work ethic. His father had worked his way up through the ranks to become foreman of a lumber mill in Southwest Virginia. At a young age, Bob began working for his father at the mill. After earning a degree in agricultural economics at Virginia Tech, he married Maggie Horniman in 2003. Upon his return to the mill, Bob was made a supervisor. He excelled at his job and was highly respected by everyone at the mill. In 2010, facing the financial needs of an expanding family, he and Maggie began exploring employment alternatives. In late 2012, Maggie's father offered to sell the couple his wholesalenursery business, Horniman Horticulture, near Lynchburg, Virginia. The business and the opportunity to be near Maggie's family appealed to both Maggie and Bob. Pooling their savings, the proceeds from the sale of their house, a minority-business-development grant, and a sizable personal loan from Maggie's father, the Browns purchased the business for $999,000. It was agreed that Bob would run the nursery's operations and Maggie would oversee its finances. Bob thoroughly enjoyed running his own business and was proud of its growth over the previous three years. The nursery's operations filled 52 greenhouses and 40acres of productive fields and employed 12 full-time and 15 seasonal employees.Page 128 Sales were primarily to retail nurseries throughout the mid-Atlantic region. The company specialized in such woody shrubs as azaleas, camellias, hydrangeas, and rhododendrons, but also grew and sold a wide variety of annuals, perennials, and trees.1 Over the previous two years, Bob had increased the number of plant species grown at the nursery by more than 40%. Bob was a "people person." His warm personality had endeared him to customers and employees alike. With Maggie's help, he had kept a tight rein on costs. The effect on the business's profits was obvious, as its profit margin had increased from 3.1% in 2013 to an expected 5.8% in 2015. Bob was confident that the nursery's overall prospects were robust. With Bob running the business full time, Maggie primarily focused on attending to the needs of her active family. With the help of two clerks, she oversaw the company's books. Bob knew that Maggie was concerned about the recent decline in the firm's cash balance to below $10,000. Such a cash level was well under her operating target of 8% of annual revenue. But Maggie had shown determination to maintain financial responsibility by avoiding bank borrowing and by paying suppliers early enough to obtain any trade discounts.2 Her aversion to debt financing stemmed from her concern about inventory risk. She believed that interest payments might be impossible to meet if adverse weather wiped out their inventory. Maggie was happy with the steady margin improvements the business had experienced. Some of the gains were due to Bob's response to a growing demand for moremature plants. Nurseries were willing to pay premium prices for plants that delivered "instant landscape," and Bob was increasingly shifting the product mix to that line. Maggie had recently prepared what she expected to be the end-of-year financial summary (Exhibit 8.1).3 To benchmark the company's performance, Maggie used available data for the few publicly traded horticultural producers

(Exhibit 8.2). EXHIBIT 8.1 | Projected Financial Summary for Horniman Horticulture (in thousands of dollars)

2012 2013 2014 2015 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 (NFAs)] 332.1 332.5 384.3 347.9 Total assets 1,032.0 1,064.1 1,116.6 1,181.5 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 1,021.4 1,073.4 1,134.2 Capital expenditure 22.0 38.8 88.1 4.5 Purchases 140.8 145.2 161.2 185.12012 2013 2014 2015 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 x 365) 41.9 45.0 48.0 50.9 21.8 Inventory days (inventory/COGS x 365) 424.2 432.1 436.5 476.3 386.3 Payable days (AP/purchases x 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