Instructions:

Complete the 2006 forecast using the assumptions below. If a line does not have an explicit assumption, you should be able to figure it out through logic (using the structure of the financial statements and/or some simple math). Your forecast should result in entries in all the green-shaded cells below.

The firm does not pay any dividends, so all net income will flow to Net Worth on the Balance Sheet.

We will plug the cash account on the balance sheet using the following formula:

Cash = (Current Liabilities + Net Worth) - (Accounts Receivable + Inventory + Other Current Assets + Net Fixed Assets)

Once your forecast is complete, answer the discussion questions below.

1. What is going on with the cash balance in the forecast? What are the implications of this?

2. Why is the firm having such a problem with its cash account (shrinking every year)? Hint: You might want to compute the Cash Cycle and Operating Cycle for the firm. Explain your findings.

3. Is the firm's growth rate contributing to the problem? Explain.

4. Assume the firm wants to correct it's cash problem and maintain a cash balance of 8.0% of Sales. List at least three concrete and economically feasible steps the firm could take (either by themselves or in combination) to achieve this goal.

Exhibit 1 HORNIMAN HORTICULTURE Projected Horniman Horticulture Financial Summary Assumptions Historic Results 2003 2004 Forecast 2006 2002 2005 Profit and loss statement Revenue Cost of goods sold Gross profit SG&A expense Depreciation Operating profit Taxes Net profit 788.5 402.9 385.6 301.2 34.2 50.2 17.6 32.6 807.6 428.8 378.8 302.0 38.4 38.4 13.1 25.3 908.2 437.7 470.5 356.0 36.3 78.2 26.2 52.0 1048.8 503.4 545.4 404.5 40.9 100.0 39.2 60.8 1363.4 30% growth rate 654.42 708.99 52% of Sales 526.29 38.6% of Sales 46 given in case footnote 4 228.70 89.65 39.2% of Operating Profit 70.5 Balance sheet Cash Accounts receivable Inventory Other current assets? Current assets Net fixed assets Total assets 120.1 90.6 468.3 20. 9 699.9 332.1 1032.0 105.2 99.5 507.6 19.3 731. 6 332.5 1064.1 66.8 119.5 523.4 22.6 732.3 384.3 1116.6 9.4 146.4 656.9 20.9 833.6 347.9 1181.5 9.4 Plug: Detailed above 190.32 50.9 Days in Receivables 476.3 Days in Inventory 27.27 2% of Sales 2005 NFA + CAPEX - Depreciation Accounts payable Wages payable Other payables Current liabilities Net worth 6.0 19.7 10.2 35.9 996.1 5.3 22.0 15.4 42.7 1021. 4 4.5 5.0 22.1 24.4 16.6 17.9 43.2 47.3 1073.4 1134.2 31.36 23.18 9.9 Days in Payables 2.3% of Revenue 1.7% of Revenue All income is reinvested into the firm Capital expenditure Purchases 22.0 140.8 38.8 145.2 88.1 161.2 4.5 185.1 given in case footnote 4 37% of COGS