Horniman Horticulture Must Manage Their Working Capital Efficiently

Problem Statement: Horniman Horticulture must manage their working capital efficiently.

Relevant Facts: Horniman Horticulture has grown rapidly in the four years of its existence due to Bob’s efforts and Maggie’s cost controls. Bob is confident of hitting a revenue growth rate of 30% in the coming year. Maggie who manages the finances wants to maintain cash levels of up to 8% of revenues and the declining balance has been a matter of concern. She wants to avoid bank borrowings and maintains an account payable policy of paying her suppliers within 10 days to avail discounts. To ensure long term growth prospects, Bob wants to purchase a neighboring 12-acre parcel of farmland.

Analysis: In the first two years of its operations, Horniman Horticulture maintained a cash level which was higher than the operating target of 8% of annual revenue which was set by Maggie. However, from the year 2014, the company started finding it difficult to achieve their minimum cash requirements and considering the forecasts for the year 2016, the company will be facing a negative cash flow. Quick ratio shows that the company has $17 of assets for every $1 of current liability but the business has almost run out of cash. Most of its current assets are in the form of Inventory and Account Receivables and hence they do not have enough cash to meet their obligations. The cash cycle of 517 days is considerably longer than that of the industry which is 381 days. This indicates that the company is having difficulty collecting payments from the customers or cash is tied up in goods that cannot be sold. On the other hand, the company benefits by slowing down payment of Account Payable to its suppliers, because that allows it to make use of the money longer and in this case, due to Maggie’s account payable policy, Horniman Horticulture is not making full use of the credit period provided. The company pays 5 times before it collects