Horniman Horticulture

Case Analysis 2 - Horniman Horticulture

Problem:

Horniman Horticulture has been experiencing a high growth in revenue as well as profit. At first glance the company is doing quite well. Despite producing a strong profit Horniman is losing cash quickly. Their accounts receivable is growing fast as well as the time it takes to collect credit sales. Their accounts payable are also increasing and they are paying their debt off much faster than the benchmark of the industry. The inventory turnover is also much higher than benchmark. The high inventory leads to great inventory costs as direct labour, materials, scrap, and overhead. Horniman has a poor accounts receivable and accounts payable policies, along with long inventory turnover, which has led to them lacking cash even though they have a strong profit.

Assessment of Financial Performance

Horniman Horticulture gross profit has made great leaps in the past 4 years increasing by 29%. Cost of goods sold has decreased from 51.1% of sales to 48% of sales. With SG&A expenses, depreciation, and taxes increasing at a proportional rate the operating profit and net profit has also increased nicely. The company has grown immensely in the past 4 years in terms of revenue and profit.

Their net profit margin of 5.8% is much higher than the benchmark of 2.8% for the industry. This is a great positive. Another positive is that their return on assets at 5.1% and return on capital at 5.4% are both above the benchmarks for the industry. They are operating at a profit and getting a good return on their investments.

There are some major concerns even though business is growing. In 2012 cash was 11.64% of total assets and in 2015 it is only .8%. That is dangerously low as they are moving towards operating in a negative cash flow. The company needs cash to operate through hardships if they happen to come up.

Accounts receivable have been increasing every year. It has went from 8.78% of total assets in 2012 to 12.39% in 2015. It also takes Horniman 2.3 times longer to collect credit sales. Their collection period is 50.9 days while the benchmark for horticulture producers is 21.8 days. Cash flows are greatly reduced by an increasing number of credit sales and a long collection period. In 2015, Horniman’s Cash Conversion Cycle was 517.39, while the average horticultural company had a cycle of 381.20 days. More and more of their revenue is been caught up in accounts receivable which means less of their profit is being converted to cash.

Accounts payable days has decreased from 15.6 days in 2012 to 9.9 days in 2015. This can be due to the fact they receive a 2% discount for payments made in under 10 days. This is an extremely quick payback period as most horticulture companies have payment periods of 26.9 days. Horniman has both a long collection period and are paying back their debts in a third of the amount of time of the benchmark for the industry.

Horniman also has a lot of it’s money tied up in inventory. Inventory has increased from 45.3% in 2012 to 55.6% of total assets in 2015. The average age of inventory was 424.3 days in 2012, and has increased to 476.3 days in 2015. The benchmark for average age of inventory was 386.3 days. Horniman is using money on inventory for 100 days longer than the competition.

Cash Erosion

Horniman has a very long cash cycle. The average plant sits in inventory for 476 days and when it’s sold cash isn’t collected for another 51 days. All the while they are using cash to pay suppliers very quickly to try and get the 2% discount for accounts paid under 10 days. All these factors combine to result in cash being used up very quickly and not being made back for an extremely