Bob and Maggie Brown Case

Horniman Horticulture

Bob and Maggie Brown have owned and operated Horniman Horticulture,a $1 million revenue woody-shrub nursery. Their sales were primarily to retail nurseries throughout mid-Atlantic region. The nursery's profit margin increased from 3.1% in 2002 to 5.8 in 2005.By the end of their third year operating the nursery, in 2005 , they were experiencing an increasing demand and better margins, but also they were encountering a decreasing cash balance.

Horniman Horticulture was having a difference between cash flow and accounting profits. There may have be a confusion between profits with cash flow or an underappreciation of the cash flow effects on the business growth. Where is the cash going?

Horniman Horticulture is expanding in a market where they competitors are actually declining. So, a decline in cash balance seems abnormal in a business that is generating a lot of profit. Why are they having cash flows issues? The Browns have been selling plants, and giving customer credit; every dollar of profits was reinvested in the nursery, through capital expenditures and investments in net working capital. Also, Maggie brown was scared of taking credit for fear of storm wiping out crops and not being able to pay the liability. So there is no questioning why the nursery is having negative cash flows. For returning to a good standing, Horniman Horticulture needs to return to a percentage of 8% of revenue as the cash flow is negative.