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CASE
11
Horniman Horticulture
Bob Brown hummed along to a seasonal carol on the van radio as he made his way
over the dark and icy roads of Amherst County, Virginia. He and his crew had just
finished securing their nursery against some unexpected chilly weather. It was Christ-
mas Eve 2005, and Bob, the father of four boys ranging in age from 5 to 10, was
anxious to be home. Despite the late hour, he fully anticipated the hoopla that would
greet him on his return and knew that it would be some time before even the youngest
would be asleep. He regretted that the boys’ holiday gifts would not be substantial;
money was again tight this year. Nonetheless, Bob was delighted with what his com-
pany had accomplished. Business was booming. Revenue for 2005 was 15% ahead of
2004, and operating profits were up even more.
Bob had been brought up to value a strong work ethic. His father had worked his
way up through the ranks to become foreman of a lumber mill in Southwest Virginia.
At a young age, Bob began working for his father at the mill. After earning a degree
in agricultural economics at Virginia Tech, he married Maggie Horniman in 1993. Upon
his return to the mill, Bob was made a supervisor. He excelled at his job and was highly
respected by everyone at the mill. In 2000, facing the financial needs of an expanding
family, he and Maggie began exploring employment alternatives. In late 2002, Maggie’s
father offered to sell the couple his wholesale nursery business, Horniman Horticulture,
near Lynchburg, Virginia. The business and the opportunity to be near Maggie’s family
appealed to both Maggie and Bob. Pooling their savings, the proceeds from the sale of
their house, a minority-business-development grant, and a sizable personal loan from
Maggie’s father, the Browns purchased the business for $999,000. It was agreed that
Bob would run the nursery’s operations and Maggie would oversee its finances.
Bob thoroughly enjoyed running his own business and was proud of its growth
over the previous three years. The nursery’s operations filled 52 greenhouses and 40
acres of productive fields and employed 12 full-time and 15 seasonal employees. Sales
were primarily to retail nurseries throughout the mid-Atlantic region. The company

This case was prepared by Michael J. Schill, Robert F. Vandell Research Associate Professor of Business
Administration, as a basis for class discussion rather than to illustrate effective or ineffective handling of an
administrative situation. Horniman Horticulture is a fictional company reflecting the issues facing actual
firms. Copyright © 2006 by the University of Virginia Darden School Foundation, Charlottesville, VA. All
rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
form or by any means––electronic, mechanical, photocopying, recording, or otherwise––without the
permission of the Darden School Foundation. Rev. 04/11.

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176 Part Two Financial Analysis and Forecasting

specialized in such woody shrubs as azaleas, camellias, hydrangeas, and rhododen-

drons, but also grew and sold a wide variety of annuals, perennials, and trees.1 Over
the previous two years, Bob had increased the number of plant species grown at the
nursery by more than 40%.
Bob was a “people person.” His warm personality had endeared him to customers
and employees alike. With Maggie’s help, he had kept a tight rein on costs. The effect
on the business’s profits was obvious, as its profit margin had increased from 3.1%
in 2003 to an expected 5.8% in 2005. Bob was confident that the nursery’s overall
prospects were robust.
With Bob running the business full time, Maggie primarily focused on attending
to the needs of her active family. With the help of two clerks, she oversaw the com-
pany’s books. Bob knew that Maggie was concerned about the recent decline in the
firm’s cash balance to below $10,000. Such a cash level was well under her operat-
ing target of 8% of annual revenue. But Maggie had shown determination to main-
tain financial responsibility by avoiding bank borrowing and by paying suppliers early
enough to obtain any trade discounts.2 Her aversion to debt financing stemmed from
her concern about inventory risk. She believed that interest payments might be impos-
sible to meet if adverse weather wiped out their inventory.
Maggie was happy with the steady margin improvements the business had expe-
rienced. Some of the gains were due to Bob’s response to a growing demand for more-
mature plants. Nurseries were willing to pay premium prices for plants that delivered
“instant landscape,” and Bob was increasingly shifting the product mix to that line.
Maggie had recently prepared what she expected to be the end-of-year financial sum-
mary (Exhibit 1).3 To benchmark the company’s performance, Maggie used available
data for the few publicly traded horticultural producers (Exhibit 2).
Across almost any dimension of profitability and growth, Bob and Maggie agreed
that the business appeared to be strong. They also knew that expectations could change
quickly. Increases in interest rates, for example, could substantially slow market
demand. The company’s margins relied heavily on the hourly wage rate of $8.51, cur-
rently required for H2A-certified nonimmigrant foreign agricultural workers. There
was some debate within the U.S. Congress about the merits of raising this rate.
Bob was optimistic about the coming year. Given the ongoing strength of the
local economy, he expected to have plenty of demand to continue to grow the busi-
ness. Because much of the inventory took two to five years to mature sufficiently to
sell, his top-line expansion efforts had been in the works for some time. Bob was sure

1
Over the past year, Horniman Horticulture had experienced a noticeable increase in business from small
nurseries. Because the cost of carrying inventory was particularly burdensome for those customers, slight
improvements in the credit terms had been accompanied by substantial increases in sales.
2
Most of Horniman’s suppliers provided 30-day payment terms, with a 2% discount for payments received
within 10 days.
3
As compensation for the Browns’ services to the business, they had drawn an annual salary of $50,000
(itemized as an SG&A expense) for each of the past three years. This amount was effectively the family’s
entire income.
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Case 11 Horniman Horticulture 177

that 2006 would be a banner year, with expected revenue hitting a record 30% growth
rate. In addition, he looked forward to ensuring long-term-growth opportunities with
the expected closing next month on a neighboring 12-acre parcel of farmland.4 But
for now, it was Christmas Eve, and Bob was looking forward to taking off work for
the entire week. He would enjoy spending time with Maggie and the boys. They had
much to celebrate for 2005 and much to look forward to in 2006.

4
With the acquisition of the additional property, Maggie expected 2006 capital expenditures to be $75,000.
Although she was not planning to finance the purchase, prevailing mortgage rates were running at 6.5%.
The expected depreciation expense for 2006 was $46,000.
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178 Part Two Financial Analysis and Forecasting

EXHIBIT 1 | Projected Financial Summary for Horniman Horticulture (in thousands of dollars)

2002 2003 2004 2005

Profit and loss statement
Revenue 788.5 807.6 908.2 1048.8
Cost of goods sold 402.9 428.8 437.7 503.4
Gross profit 385.6 378.8 470.5 545.4
SG&A expense 301.2 302.0 356.0 404.5
Depreciation 34.2 38.4 36.3 40.9
Operating profit 50.2 38.4 78.2 100.0
Taxes 17.6 13.1 26.2 39.2
Net profit 32.6 25.3 52.0 60.8

Balance sheet
Cash 120.1 105.2 66.8 9.4
Accounts receivable 90.6 99.5 119.5 146.4
Inventory1 468.3 507.6 523.4 656.9
Other current assets2 20.9 19.3 22.6 20.9
Current assets 699.9 731.6 732.3 833.6
Net fixed assets3 332.1 332.5 384.3 347.9
Total assets 1,032.0 1,064.1 1,116.6 1,181.5

Accounts payable 6.0 5.3 4.5 5.0

Wages payable 19.7 22.0 22.1 24.4
Other payables 10.2 15.4 16.6 17.9
Current liabilities 35.9 42.7 43.2 47.3
Net worth 996.1 1,021.4 1,073.4 1,134.2

Capital expenditure 22.0 38.8 88.1 4.5

Purchases4 140.8 145.2 161.2 185.1

1
Inventory investment was valued at the lower of cost or market. The cost of inventory was determined by accumulating the costs asso-
ciated with preparing the plants for sale. Costs that were typically capitalized as inventory included direct labor, materials (soil, water,
containers, stakes, labels, chemicals), scrap, and overhead.
2
Other current assets included consigned inventory, prepaid expenses, and assets held for sale.
3
Net fixed assets included land, buildings and improvements, equipment, and software.
4
Purchases represented the annual amount paid to suppliers.
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Case 11 Horniman Horticulture 179

EXHIBIT 2 | Financial Ratio Analysis and Benchmarking

2002 2003 2004 2005 Benchmark1

Revenue growth 2.9% 2.4% 12.5% 15.5% (1.8)%
Gross margin (gross profit/revenue) 48.9% 46.9% 51.8% 52.0% 48.9%
Operating margin (op. profit/revenue) 6.4% 4.8% 8.6% 9.5% 7.6%
Net profit margin (net profit/revenue) 4.1% 3.1% 5.7% 5.8% 2.8%

Return on assets (net profit/total assets) 3.2% 2.4% 4.7% 5.1% 2.9%
Return on capital (net profit/total capital) 3.3% 2.5% 4.8% 5.4% 4.0%

Receivable days (AR/revenue ⫻ 365) 41.9 45.0 48.0 50.9 21.8

Inventory days (inventory/COGS ⫻ 365) 424.2 432.1 436.5 476.3 386.3
Payable days (AP/purchases ⫻ 365) 15.6 13.3 10.2 9.9 26.9
NFA turnover (revenue/NFA) 2.4 2.4 2.4 3.0 2.7

1
Benchmark figures were based on 2004 financial ratios of publicly traded horticultural producers.