Nelson Nurseries Roger Barton 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 2020, and Roger, 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 retum 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 tight again this year. Nonetheless, Roger was delighted with what his company had accomplished. Business was booming. Revenue for 2020 was 15% ahead of 2019, and operating profits were up even more. Roger had been raised 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, Roger began working for his father at the mill. After eaming a degree in agricultural economics at Virginia Tech, he married Christine Nelson in 2008. Upon his return to the mill Roger was made a supervisor. He excelled at his job and was highly respected by everyone at the mill. In 2015, facing the financial needs of an expanding family, he and Christine began exploring employment alternatives. In late 2017, Christine's father offered to sell the couple his wholesale nursery business, Nelson Nurseries, near Lynchburg, Virginia. The business and the opportunity to be near Christine's family appealed to both Christine and Roger. Pooling their savings, the proceeds from the sale of their house, a minority-business-development grant and a sizable personal loan from Christine's father, the Bartons purchased the business. They agreed that Roger would run the nursery's operations and Christine would oversee its finances. Roger 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 40 acres of productive fields, and the business employed 12 full-time and 15 seasonal employees. 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 amuals, perennials, and trees. Over the previous two years, Roger had increased the number of plant species grown at the nursery by more than 40%. Roger was a people person. His warm personality endeared him to customers and employees alike. With Christine's help, he 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 2018 to an expected 5.8% in 2020. Roger was confident that the nursery's overall prospects were robust. With Roger running the business full-time, Christine focused on attending to the needs of their active family and with the help of two clerks, oversaw the company's books. Roger knew that Christine was concemed 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 Christine had shown determination to maintain fnancial 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 concem about inventory risk. She believed that interest payments might be impossible to meet if adverse weather wiped out their inventory. Christine was happy with the steady margin improvements the business had experienced. Some of the gains were due to Roger's response to a growing demand for more-mature plants. Nurseries were willing to pay premium prices for plants that delivered "instant landscape," and Roger was increasingly shifting the product mix to that line. Christine had recently prepared what she expected to be the end-of-year financial summary Exhibit 1). "To benchmark the company's performance, Christine had used available data for the few publicly traded horticultural producers Exhibit 2). Roger and Christine agreed that across almost any dimension of profitability and growth, the business appeared to be strong. They also knew that expectations could change quickly. Increases in interest rates, for example, could substantially slow market demand. The company's margins relied heavily on the hourly wage rate of $10.32, currently required for H2A-certified nonimmigrant foreign agricultural workers. There was some debate within the US Congress about the merits of raising this rate. Roger was optimistic about the coming year. Given the ongoing strength of the local economy, he expected to have plenty of demand to continue to grow the business. Because much of the inventory took two to five years to mature sufficiently to sell, his top-line expansion efforts had been in the works for some time. Roger was sure that 2021 would be a bamer year, with expected revenue hitting a record 30% growth rate. In addition, he looked forward to ensuring long-term-growth opportunities by buying a neighboring 12-acre parcel of farmland, on which he expected to close next month + But for now, it was Christmas Eve, and Roger was looking forward to taking off work for the entire week. He would enjoy spending time with Christine and the boys. They had much to celebrate for 2020 and much to look forward to in 2021. Exhibit 1 Nelson Nurseries Projected Financial Summary for Nelson Nurseries (in thousands of dollars) 2017 2018 2019 2020 788.5 807.6 908.2 402.9 385.6 428.8 378.8 Profit and Loss Statement Revenue Cost of goods sold Gross profit SG&A espense Depreciation Operating profit Taxes Net profit 437.7 470.5 356.0 36.3 1,048.8 503.4 545.4 404.5 40.9 301.2 302.0 34.2 38.4 78.2 50.2 176 38.4 13.1 26.2 52.0 100.0 39.2 60.8 32.6 25.3 105.2 66.8 9.4 120.1 90.6 468.3 99.5 507.6 119.5 523.4 146.4 656.9 Balance Sheet Cash Accounts receivable Inventory Other current assets- Current assets Net fesed assets Total assets 20.9 19.3 699.9 731.6 22.6 20.9 732.3 833.6 384.3 347.9 1,116.6 1,181.5 332.1 332.5 1,032.0 1,064.1 6.0 19.7 5.3 22.0 4.5 22.1 5.0 24.4 Accounts payable Wages payable Other payables Current liabilities Net worth 10.2 15.4 17.9 16.6 43.2 35.9 42.7 47.3 996.1 1,021.4 1,073.4 1,134.2 4.5 Capital expenditure Purchases Source: All exhibits created by author. 22.0 140.8 38.8 145.2 88.1 161.2 185.1 Exhibit 2 Nelson Nurseries Financial Ratio Analysis of Nelson Nurseries and Benchmarking 2017 2018 2019 2020 Benchmarkt 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% 6.4% 4.8% 8.6% 9.5% 7.6% Operating margin Recating profit / revenue) 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% 41.9 45.0 48.0 50.9 21.8 Receivable days Caccounts receivable [AR] / revenue * 365) Inventory days (mventory / cost of goods sold [COGS] 365) 424.2 432.1 436.5 476.3 386.3 Payable days (accounts payable [AP] / purchases * 365) 15.6 13.3 10.2 9.9 26.9 Net fixed assets (NFA) turnover (revenue/NFA) 2.4 2.4 2.4 3.0 2.7 QUESTIONS 1. What is your assessment of the financial performance of Nelson Nurseries? 2. Do you agree with Christine Barton's accounts payable policy? 3. What explains the erosion of the cash balance? 4. What do you expect the financial position of the business to be in 2021? Extend the financial statements through 2021, assuming that Roger grows revenue by 30%. Note: To make the balance sheet balance, define cash as equal to (Current liabilities + Net worth) - (Accounts receivable + Inventory + Other current assets + Net fixed assets). Nelson Nurseries Roger Barton 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 2020, and Roger, 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 retum 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 tight again this year. Nonetheless, Roger was delighted with what his company had accomplished. Business was booming. Revenue for 2020 was 15% ahead of 2019, and operating profits were up even more. Roger had been raised 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, Roger began working for his father at the mill. After eaming a degree in agricultural economics at Virginia Tech, he married Christine Nelson in 2008. Upon his return to the mill Roger was made a supervisor. He excelled at his job and was highly respected by everyone at the mill. In 2015, facing the financial needs of an expanding family, he and Christine began exploring employment alternatives. In late 2017, Christine's father offered to sell the couple his wholesale nursery business, Nelson Nurseries, near Lynchburg, Virginia. The business and the opportunity to be near Christine's family appealed to both Christine and Roger. Pooling their savings, the proceeds from the sale of their house, a minority-business-development grant and a sizable personal loan from Christine's father, the Bartons purchased the business. They agreed that Roger would run the nursery's operations and Christine would oversee its finances. Roger 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 40 acres of productive fields, and the business employed 12 full-time and 15 seasonal employees. 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 amuals, perennials, and trees. Over the previous two years, Roger had increased the number of plant species grown at the nursery by more than 40%. Roger was a people person. His warm personality endeared him to customers and employees alike. With Christine's help, he 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 2018 to an expected 5.8% in 2020. Roger was confident that the nursery's overall prospects were robust. With Roger running the business full-time, Christine focused on attending to the needs of their active family and with the help of two clerks, oversaw the company's books. Roger knew that Christine was concemed 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 Christine had shown determination to maintain fnancial 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 concem about inventory risk. She believed that interest payments might be impossible to meet if adverse weather wiped out their inventory. Christine was happy with the steady margin improvements the business had experienced. Some of the gains were due to Roger's response to a growing demand for more-mature plants. Nurseries were willing to pay premium prices for plants that delivered "instant landscape," and Roger was increasingly shifting the product mix to that line. Christine had recently prepared what she expected to be the end-of-year financial summary Exhibit 1). "To benchmark the company's performance, Christine had used available data for the few publicly traded horticultural producers Exhibit 2). Roger and Christine agreed that across almost any dimension of profitability and growth, the business appeared to be strong. They also knew that expectations could change quickly. Increases in interest rates, for example, could substantially slow market demand. The company's margins relied heavily on the hourly wage rate of $10.32, currently required for H2A-certified nonimmigrant foreign agricultural workers. There was some debate within the US Congress about the merits of raising this rate. Roger was optimistic about the coming year. Given the ongoing strength of the local economy, he expected to have plenty of demand to continue to grow the business. Because much of the inventory took two to five years to mature sufficiently to sell, his top-line expansion efforts had been in the works for some time. Roger was sure that 2021 would be a bamer year, with expected revenue hitting a record 30% growth rate. In addition, he looked forward to ensuring long-term-growth opportunities by buying a neighboring 12-acre parcel of farmland, on which he expected to close next month + But for now, it was Christmas Eve, and Roger was looking forward to taking off work for the entire week. He would enjoy spending time with Christine and the boys. They had much to celebrate for 2020 and much to look forward to in 2021. Exhibit 1 Nelson Nurseries Projected Financial Summary for Nelson Nurseries (in thousands of dollars) 2017 2018 2019 2020 788.5 807.6 908.2 402.9 385.6 428.8 378.8 Profit and Loss Statement Revenue Cost of goods sold Gross profit SG&A espense Depreciation Operating profit Taxes Net profit 437.7 470.5 356.0 36.3 1,048.8 503.4 545.4 404.5 40.9 301.2 302.0 34.2 38.4 78.2 50.2 176 38.4 13.1 26.2 52.0 100.0 39.2 60.8 32.6 25.3 105.2 66.8 9.4 120.1 90.6 468.3 99.5 507.6 119.5 523.4 146.4 656.9 Balance Sheet Cash Accounts receivable Inventory Other current assets- Current assets Net fesed assets Total assets 20.9 19.3 699.9 731.6 22.6 20.9 732.3 833.6 384.3 347.9 1,116.6 1,181.5 332.1 332.5 1,032.0 1,064.1 6.0 19.7 5.3 22.0 4.5 22.1 5.0 24.4 Accounts payable Wages payable Other payables Current liabilities Net worth 10.2 15.4 17.9 16.6 43.2 35.9 42.7 47.3 996.1 1,021.4 1,073.4 1,134.2 4.5 Capital expenditure Purchases Source: All exhibits created by author. 22.0 140.8 38.8 145.2 88.1 161.2 185.1 Exhibit 2 Nelson Nurseries Financial Ratio Analysis of Nelson Nurseries and Benchmarking 2017 2018 2019 2020 Benchmarkt 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% 6.4% 4.8% 8.6% 9.5% 7.6% Operating margin Recating profit / revenue) 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% 41.9 45.0 48.0 50.9 21.8 Receivable days Caccounts receivable [AR] / revenue * 365) Inventory days (mventory / cost of goods sold [COGS] 365) 424.2 432.1 436.5 476.3 386.3 Payable days (accounts payable [AP] / purchases * 365) 15.6 13.3 10.2 9.9 26.9 Net fixed assets (NFA) turnover (revenue/NFA) 2.4 2.4 2.4 3.0 2.7 QUESTIONS 1. What is your assessment of the financial performance of Nelson Nurseries? 2. Do you agree with Christine Barton's accounts payable policy? 3. What explains the erosion of the cash balance? 4. What do you expect the financial position of the business to be in 2021? Extend the financial statements through 2021, assuming that Roger grows revenue by 30%. Note: To make the balance sheet balance, define cash as equal to (Current liabilities + Net worth) - (Accounts receivable + Inventory + Other current assets + Net fixed assets)