Question
In late 2012, Bob Brown and his wife Maggie bought Horniman Horticulture from Maggies father, who was retiring. Browns purchased the business for $999,000. Horniman
In late 2012, Bob Brown and his wife Maggie bought Horniman Horticulture from Maggies father, who was retiring. Browns purchased the business for $999,000.
Horniman Horticulture was a well-established wholesale nursery serving retailers up and down the east coast. The nurserys operations filled 52 greenhouse and 40 acres of productive fields and employed 12 full-time and 15 seasonal employees. Bob was a people person and had expanded Hornimans customer base with his style. Over the last year, Horniman had experienced a noticeable increase in business from small nurseries. Since taking over, Bob had increased the number of plant species grown at the. Nursery by more than 40%. Because the cost of carrying inventory was particularly burdensome for those customers, Bob had made loosened the companys credit terms. This had been accompanied by substantial increases in sales. Bob was confident that the nurserys overall prospects were robust.
Maggie kept a tight rein on costs. The effect on the businesss profits was obvious, as its profit margin had increased since the couple took over. She was pleased with the rising sales and increasing margins but was concerned about the recent decline in the firms cash balance to below $10,000. Such a cash level was well under her operating target of 8% of annual revenue.
Maggie had shown determination to maintain financial responsibility by avoiding bank borrowing and by paying suppliers early enough to obtain any trade discounts. (Most of Hornimans suppliers provided 30-day terms with a 2% discount for payments received within 10 days.). Maggie had been raised to be financially conservative and was very averse to debt. Her aversion stemmed from her concerned about inventory risk. She believed that interest payments might be impossible to meet if adverse weather wiped out their inventory.
Bob and Maggie were happy with the improvements the business had experienced. Some of thee gains were due to Bobs response to a growing demand for more mature 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. Because much of the inventory took two to five years to mature to sell, his top-line expansion efforts had been in the works for some time but he expected this strategy to begin paying off as early as next year.
Given the ongoing strength of the economy,he expected 2016 to be a banner year with revenue hitting a record 30% growth. In addition, he hoped to ensure long-term-growth opportunities by purchasing a neighboring 12-acre parcel of farmland.
If the company acquired the additional property, Maggie expected 2016 capital expenditures to be $75,000. She was hoping not to have to finance the purchase with debt but had checked and found prevailing mortgage rates were 6.5%. If the new parcel was acquired, she figured next years depreciation expense to be $46,000.
Your assignment is to use the financial information provided to perform a financial analysis on Horniman Horticulture since Bob and Maggie took over in 2012 with special attention to how management decisions they have made have affected liquidity, profitability, operating cycle and financial stability.You will also want to prepare pro forma projections based on the couples plans.
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Financial Accounting
Authors: Charles T. Horngren, Jr. Harrison, Walter T.
2nd Edition
0133118207, 978-0133118209
