DardenBusinessPublishing:213653

UVA-F-1512
Rev. Apr. 13, 2011

This document is authorized for use only by Saurabh Gupta at university of Calgary .
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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 Christmas 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 company 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, Maggies father offered to sell the couple his wholesale nursery
business, Horniman Horticulture, near Lynchburg, Virginia. The business and the opportunity to
be near Maggies 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 Maggies father, the Browns purchased the business for $999,000. It was agreed that Bob
would run the nurserys 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 nurserys 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 specialized in such woody shrubs as
azaleas, camellias, hydrangeas, and rhododendrons, but also grew and sold a wide variety of

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 otherwisewithout the permission of the Darden School
Foundation.

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This document is authorized for use only by Saurabh Gupta at university of Calgary .
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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 Maggies help, he had kept a tight rein on costs. The effect on the
businesss 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 nurserys 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 companys books. Bob
knew that Maggie was concerned about the recent decline in the firms cash balance to below
$10,000. Such a cash level was well under her operating target of 8% of annual revenue. But
Maggie had shown determination to maintain 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 impossible to meet if adverse weather wiped out their inventory.
Maggie was happy with the steady margin improvements the business had experienced.
Some of the gains were due to Bobs 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 summary (Exhibit 1).3 To benchmark the companys
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 companys
margins relied heavily on the hourly wage rate of $8.51, currently 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 business. 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 that 2006 would be a banner year,
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 Hornimans 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 familys entire
income.

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UVA-F-1512

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.

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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Exhibit 1
HORNIMAN HORTICULTURE
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Projected Financial Summary for Horniman Horticulture

(in thousands of dollars)

Profit and loss statement

Revenue
Cost of goods sold
Gross profit
SG&A expense
Depreciation
Operating profit
Taxes
Net profit
Balance sheet
Cash
Accounts receivable
Inventory1
Other current assets2
Current assets
Net fixed assets3
Total assets

2002

2003

2004

2005

788.5
402.9
385.6
301.2
34.2
50.2
17.6
32.6

807.6
428.8
378.8
302.0
38.4
38.4
13.1
25.3

908.2
437.7
470.5
356.0
36.3
78.2
26.2
52.0

1048.8
503.4
545.4
404.5
40.9
100.0
39.2
60.8

120.1
105.2
66.8
9.4
90.6
99.5
119.5
146.4
468.3
507.6
523.4
656.9
20.9
19.3
22.6
20.9
699.9
731.6
732.3
833.6
332.1
332.5
384.3
347.9
1,032.0 1,064.1 1,116.6 1,181.5

Accounts payable
Wages payable
Other payables
Current liabilities
Net worth

6.0
5.3
4.5
5.0
19.7
22.0
22.1
24.4
10.2
15.4
16.6
17.9
35.9
42.7
43.2
47.3
996.1 1,021.4 1,073.4 1,134.2

Capital expenditure
Purchases4

22.0
140.8

38.8
145.2

88.1
161.2

4.5
185.1

Inventory investment was valued at the lower of cost or market. The cost of inventory was determined by
accumulating the costs associated 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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Exhibit 2
HORNIMAN HORTICULTURE
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Financial Ratio Analysis and Benchmarking

2002
Revenue growth
Gross margin (gross profit/revenue)
Operating margin (op. profit/revenue)
Net profit margin (net profit/revenue)

2003

2004

2005

2.9% 2.4% 12.5% 15.5%

48.9% 46.9% 51.8% 52.0%
6.4% 4.8% 8.6% 9.5%
4.1% 3.1% 5.7% 5.8%

Benchmark1
(1.8)%
48.9%
7.6%
2.8%

Return on assets (net profit/total assets)

Return on capital (net profit/total capital)

3.2%
3.3%

2.4%
2.5%

4.7%
4.8%

5.1%
5.4%

2.9%
4.0%

Receivable days (AR/revenue 365)

Inventory days (inventory/COGS 365)
Payable days (AP/purchases 365)
NFA turnover (revenue/NFA)

41.9
424.2
15.6
2.4

45.0
432.1
13.3
2.4

48.0
436.5
10.2
2.4

50.9
476.3
9.9
3.0

21.8
386.3
26.9
2.7

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

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