Bob and Maggie Brown bought Horniman Horticulture, a family-owned business, from Maggie’s parents in 2002 for $999,000. Bob runs the nursery’s operations and Maggie oversees the company’s finances. Contributing to the success, Bob had grew the number of plant species grown at the nursery by more than 40%. Their 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