 Summary:

Bob and Maggie Brown bought Horniman Horticulture, a family-owned business, from Maggie’s parents in 2002
for $999,000. They both thoroughly enjoy the choice they made to own their own business and have done an
excellent job maintaining it as it has grown healthily over the first three years. Bob runs the nursery’s operations
and Maggie oversees the company’s finances. Contributing to the success, from 2003 to 2005, Bob had grew the
number of plant species grown at the nursery by more than 40%. He and his wife also kept a tight rein on costs
and the business profit was obvious. The profit margin had increased to an expected 5.8% in 2005, and Bob was
confident with the success the local economy was experiencing that a high demand would keep his business
booming. Because much of his inventory took two to five years to reach maturity, his expansion efforts had been
in the works for a while by 2005. He was optimistic that 2006 would be a banner year, expecting a 30% revenue
growth rate. In addition, ensuring their long-term growth opportunities, he and Maggie were hoping to expand
their business by closing on a neighboring 12-acre piece of farmland at the end of 2005.

 Problem:
Although their profits were growing rapidly over their first few years, contrarily, the cash on hand has been
decreasing to a point where it was less than their target level of 8% of annual revenue in 2005. What they ended
up with was a liquidity problem, because most of their cash is tied up in inventory and accounts receivable. It
seems apparent, too, that the unsustainable growth rate is realized as the cause for their depleting cash balance.
Their impressive growth is attributed to their heavy asset investment in growing the size of their nursery, yet it has
brought the firm’s cash balance to below $10,000 at the year end of 2005. Achieving sustainable growth to the
point where the cash flow is not decreasing each year, but instead accompanying for at least 8% of their annual
revenue each year, is the goal. Also, in an attempt to remain financially responsible, Maggie refuses to take a bank
loan and refuses to finance the company with debt. Yet they are acting as a bank to customers since they offer
such long payment periods. They are leaving cash held up in accounts receivable for an average of 51 days and in
order to obtain all trade discounts, are making payments within 10 days.

 Solutions: -
• Decrease accounts receivable days.

o Receivable days are calculated using the following formula:

Accounts receivable/revenue*365

o By collecting debts sooner, the cash balance would increase and accounts receivable would
decrease.

o Preferred customer policy for customers that either have large orders or customers to pay early on
account receivable. They can give discount or they could offer some of their more unique plants to
the preferred customers before they let anyone else have the opportunity to buy them.

• Taking a loan: - Although they’re adamant to maintain financial responsibility. The cash problem with
the company would drain the business if the solution is not implemented and would drain the company’s
growth. For growth and sound financial growing, I believe they can successfully finance any loan. Their
 growth rate is definitely higher than the loan repayment rate and would help to company to get a better
shape.

• Accounts payable: - They should tie the account payable to the account receivable and should not pay before
receiving the money. This would enable them better and would not drain them out of their cash Paying for
purchases within the 10-day period to receive a 2% discount, this illustrates that the Browns are making
payments five times faster than they are receiving them.

 Merits and Demerits of possible solutions of the case:

Merits: Apparent Merits of all the above suggested solution is to improve the cash situation of the company keeping in
tandem the growth of the company.

Demerits:
Decrease accounts receivable days:
o It would change the customer purchase behavior as the company is expecting the money sooner.
o Would increase the customer switching thereby decreasing loyalty of the customer.
Taking a loan
o Would burden with additional debt payment and interest for the organization decreasing the margins.
Accounts payable:
o Would have to give away trade discounts. Bargaining power with supplier decreases.