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Horniman Horticulture

In: Business and Management

Submitted By burrnic2
Words 337
Pages 2
In the case we are given the information that revenues are expected to increase by 30% and are asked to develop a forecast of the financial statements for 2006. I used this information to forecast out the revenues and all of the accounts for my balance sheet as well. For COGS and SG&A I used an average percentage, developed from the last four years data, of each divided by revenue. Depreciation was given in the footnotes on page 3 and for taxes I once again used an average of the tax for each year divided by operating profit for the 2006 Income statement projections. Some of the issues I see with using this method is that I did is that not all balance sheet accounts will increase proportionately with the revenue and so this creates a very unrealistic and unreliable projection of the balance sheet. I also projected the cash to increase by 30% as well, but the cash account has been decreasing rapidly since Bob and Maggie took over the business. The way they are doing things is working for now; in the future I think they will run into problems because they are not maintaining a large enough cash balance. They do not always receive cash from their sales within 10 days and so by paying all their bills within the 10 day time frame to take advantage of the discount, they are creating a shortage in cash and thus reducing the company’s liquidity. This also creates high cost of trade credit.
To calculate the cost of trade credit I used the following formula Cost of Trade Credit = ((1 + (discount rate / (1 – discount rate))) ^ (365 / number of days after discount period)) – 1 and learned that their cost of trade is 44.59% which is much higher than they can get a bank loan for and so it makes almost no sense for them to continue operating the way they are. It is better to have cash on hand than to take the

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