Table of Contents
Problem Identification 2
Possible Solutions 3
Analysis of Solutions 3
Conclusions 4
Final Recommendations 5
Plan of Implementation 5
Problem Identification
Although business is going very well for Bob Brown and Horniman Horticulture, there are
some problems with the company’s recent financial performance in the form of cash
flows. First, Bob’s net income that he takes home in the form of a salary is low compared
to the increasing revenue and operating profits. The cash balance for the company had also
fallen recently to below $10,000. That cash level was below the operating target of 8% of
annual revenue or $83,904. The chart below graphically displays the drop in the cash level
in order to reinforce the dramatic nature of the decrease. A review of the financial ratio
analysis revealed that revenue growth was well above the benchmark rate of -1.8%.
Horniman’s revenue was growing at a rate of 15.5% in 2005. However, the average
receivable days were much longer at Horniman than they were at other publicly traded
horticulture producers. The receivable days had also been increasing at Horniman over the
past four years. The benchmark days were 21.8 and Horniman’s receivable days were
50.9. This means that Horniman was collecting on its sales in a much longer time period
than others in the industry. It also held its inventory for much longer than other
horticulture producers. Inventory days at Horniman were 476.3 in 2005 and the benchmark
was at 386.3 days.
Possible Solutions
Bob Brown and his wife, Maggie, are concerned about the recent decline in the firm’s cash
balance. The cash balance has been declining steadily over the past four years, in part,
because of the increasing accounts receivable days. In order to increase the cash balance,
it would be advantageous to Horniman to implement policies that will allow it to collect on
amounts owed to it sooner. Receivable days are calculated using the following formula:
Accounts receivable/revenue*365
Decreasing receivable days would involve improving the receivable collection procedures.
By collecting debts sooner, the cash balance would increase and accounts receivable would
decrease.
Another possible solution to the dwindling cash balance is that the company could choose
to pay its bills later than it has been. The payable days at Horniman were 9.9 in 2005 as
opposed to the benchmark of 26.9 days. This means that Horniman is paying its debts
much quicker than other companies in the industry. Horniman could delay payment as long
as it insures that no interest or penalties are charges.
