Hornaman Horticulture

Problem Definition:[pic 1]

Horniman Horticulture must resolve their slow cash flow issue resulting from their receivable and payables policy and decide whether or not to invest in a 12-acre parcel of land to increase production.

Relevant Facts:

Cash flow is an issue as Horniman Horticulture is collecting their receivables at a slower rate than they are paying their suppliers. This results in Horniman essentially acting as a bank, by extending credit to their customers and eroding their own cash balance in the process.  Maggie is averse to financing the purchase of a new 12-acre parcel of land but does not have the cash resources to purchase the land in 2006.

Analysis Summary:

Land Purchase: Horniman does not currently have the financial resources to purchase the 12-acre parcel of land in 2006. The purchase will need to be financed either through debt (Exhibit 3) or equity (Exhibit 2).  As well the expansion will put a strain on their limited cash resources and further financing will be required to make the land productive for horticultural purposes. If the land is not purchased in 2006 (Exhibit 1), but rather a Right of First Refusal (ROFR) is signed with the landowner, Horniman will have the ability to defer the purchase and correct the cash flow issues. In 2007 a cash balance of $127,000 (Exhibit 1) would result if policy changes were made to accounts payable and accounts receivable allowing the purchase to be made without financing.

Cash Flow:

Accounts Payable:  The payment period for payables should be lengthened from 9.9 days to 30 days (Exhibit 5-c). This will forgo the 2% discount or savings of $13,090 but will allow Horniman to increase their cash on hand from 0 to $24,400 in 2006. The increase in the cash balance can be attributed to the tightening of credit terms discussed below and increasing payable days, enabling Horniman to use their suppliers as a source of financing.

Accounts Receivable: The days taken to collect on receivables should be shortened from 50.9 days to 30 days (Exhibit 5-b). Receivable collection period has steadily been creeping up since 2002 and in 2005 was double industry standard (Exhibit 4).  Not tightening up Hornimans credit terms could result in write downs being required due to the accumulation of bad debts, further reducing cash on hand.