1. Please develop a pro-forma financial statement for Nelson Nurseries using percentage of sales approach for the year 2021. Assume that Roger grows revenues by 30%, and determine the AFN for Nelson nurseries. Make sure to state all/any assumptions you make.
2. Assume the Collection period, Days in Inventory and Days in payables remain unchanged from 2020 to 2021. How does this change your AFN calculations?
3. Where does all of Nelsons cash go? Calculate the FCF, the Cash Conversion cycle and NWC to help in answering this question.
4. How does the business end up in this problem with their high profitability? What is the difference between cash and profits? How can a business be profitable and have cash flow problems?

100.0 Exhibit 1 Nelson Nurseries Projected Nelson Nurseries Financial Summary (in thousands of dollars) 2017 2018 2019 2020 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 301.2 302.0 336.0 404.5 Depreciation 34.2 38.4 36.3 40.9 Operating profit 50.2 38.4 78.2 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 Inventory 468.3 507.6 523.4 656.9 Other current assets 20.9 19.3 22.6 20.9 Current assets 699.9 731.6 732.3 833.6 Net fixed assets 332.1 332.5 384.3 347.9 1032.0 1064.1 1116.6 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 1021.4 1073.4 1134.2 Capital expenditure 22.0 38.8 88.1 4.5 Purchases 140.8 1452 161.2 185.1 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. Other current assets included consigned inventory, prepaid expenses, and assets held for sale. Net fixed assets included land, buildings and improvements, equipment, and software. * Purchases represented the annual amount paid to suppliers. Total assets 1181.5 2020 Benchmark (1.8)% 15.5% 52.0% 48.9% 9.5% 7.6% 5.8% 2.8% Exhibit 2 Nelson Nurseries Financial Ratio Analysis of Nelson Nurseries and Benchmarking 2017 2018 2019 Revenue growth 2.9% 2.4 12.5% Gross margin (gross profit/ revenue) 48.9% 46.99 51.8% Operating margin (operating profit revenue) 6.4% 4.8% 8.6% Net profit margin (net profit revenue) 4.1% 3.1% 5.7% Return on assets (net profit/total assets) 3.296 2.4% 4.79% Return on capital (net profit/total capital) 3.3% 2.5% 4.8% Receivable days accounts receivable [AR] revenue * 365) 41.9 45.0 48.0 Inventory days inventory cost of goods sold [COGS] *-365) 4242 432.1 436.5 Payable days ounts [AP] rchases * 365) 15.6 13.3 102 Net fixed assets (NFA) turnover (revenue/NFA) 2.4 2.4 2.4 Benchmark figures are based on 2019 financial ratios of publicly traded horticulture producers. Source: Created by author. 5.1% 2.9% 5.4% 4.0% 50.9 21.8 476.3 386.3 9.9 26.9 3.0 2.7 Roger Barton 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 2020, and Roger, 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 tight again this year. Nonetheless, Roger was delighted with what his company had accomplished. Business was booming. Revenue for 2020 was 15% ahead of 2019, and operating profits were up even more. Roger had been raised 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, Roger began working for his father at the mill. After earning a degree in agricultural economics at Virginia Tech, he married Christine Nelson in 2008. Upon his return to the mill, Roger was made a supervisor. He excelled at his job and was highly respected by everyone at the mill. In 2015, facing the financial needs of an expanding family, he and Christine began exploring employment alternatives. In late 2017, Christine's father offered to sell the couple his wholesale nursery business, Nelson Nurseries, near Lynchburg, Virginia. The business and the opportunity to be near Christine's family appealed to both Christine and Roger. Pooling their savings, the proceeds from the sale of their house, a minority-business development grant, and a sizable personal loan from Christine's father, the Bartons purchased the business. They agreed that Roger would run the nursery's operations and Christine would oversee its finances. Roger 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 the business 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 annuals, perennials, and trees.. Over the previous two years, Roger had increased the number of plant species grown at the nursery by more than 40%. Roger was a people person. His warm personality endeared him to customers and employees alike. With Christine's help, he kept a tight rein on costs. The effect on the businesses' profits was obvious, as its profit margin had increased from 3.1% in 2018 to an expected 5.8% in 2020. Roger was confident that the nursery's overall prospects were robust. Over the previous year Nelson Nurseries 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. With Roger running the business full-time, Christine focused on attending to the needs of their active family and, with the help of two clerks, oversaw the company's books. Roger knew that Christine was concerned about the recent decline in the firm's cash balance to below $10,000. Such a cash level was well under her operating target of 8% of annual revenue. But Christine 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. Christine was happy with the steady margin improvements the business had experienced. Some of the gains were due to Roger's response to a growing demand for more- mature plants. Nurseries were willing to pay premium prices for plants that delivered "instant landscape," and Roger was increasingly shifting the product mix to that line. Christine had recently prepared what she expected to be the end-of-year financial summary (Exhibit 1). To benchmark the company's performance, Christine had used available data for the few publicly traded horticultural producers (Exhibit 2). Roger and Christine agreed that across almost any dimension of profitability and growth, 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 $10.32, currently required for H2A-certified nonimmigrant foreign agricultural workers. There was some debate within the US Congress about the merits of raising this rate. Roger 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. Roger was sure that 2021 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 by buying a neighboring 12-acre parcel of farmland, on which he expected to close next month. But for now, it was Christmas Eve, and Roger was looking forward to taking off work for the entire week. He would enjoy spending time with Christine and the boys. They had much to celebrate for 2020 and much to look forward to in 2021. Most of Nelson's suppliers provided 30-day payment terms, with a 2% discount for payments received within 10 days. 3 As compensation for the Bartons' services to the business, they had drawn an annual salary of $50,000 (itemized as a selling, general, and administrative (SG&A] expense) for each of the previous three years. This amount was effectively the 100.0 Exhibit 1 Nelson Nurseries Projected Nelson Nurseries Financial Summary (in thousands of dollars) 2017 2018 2019 2020 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 301.2 302.0 336.0 404.5 Depreciation 34.2 38.4 36.3 40.9 Operating profit 50.2 38.4 78.2 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 Inventory 468.3 507.6 523.4 656.9 Other current assets 20.9 19.3 22.6 20.9 Current assets 699.9 731.6 732.3 833.6 Net fixed assets 332.1 332.5 384.3 347.9 1032.0 1064.1 1116.6 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 1021.4 1073.4 1134.2 Capital expenditure 22.0 38.8 88.1 4.5 Purchases 140.8 1452 161.2 185.1 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. Other current assets included consigned inventory, prepaid expenses, and assets held for sale. Net fixed assets included land, buildings and improvements, equipment, and software. * Purchases represented the annual amount paid to suppliers. Total assets 1181.5 2020 Benchmark (1.8)% 15.5% 52.0% 48.9% 9.5% 7.6% 5.8% 2.8% Exhibit 2 Nelson Nurseries Financial Ratio Analysis of Nelson Nurseries and Benchmarking 2017 2018 2019 Revenue growth 2.9% 2.4 12.5% Gross margin (gross profit/ revenue) 48.9% 46.99 51.8% Operating margin (operating profit revenue) 6.4% 4.8% 8.6% Net profit margin (net profit revenue) 4.1% 3.1% 5.7% Return on assets (net profit/total assets) 3.296 2.4% 4.79% Return on capital (net profit/total capital) 3.3% 2.5% 4.8% Receivable days accounts receivable [AR] revenue * 365) 41.9 45.0 48.0 Inventory days inventory cost of goods sold [COGS] *-365) 4242 432.1 436.5 Payable days ounts [AP] rchases * 365) 15.6 13.3 102 Net fixed assets (NFA) turnover (revenue/NFA) 2.4 2.4 2.4 Benchmark figures are based on 2019 financial ratios of publicly traded horticulture producers. Source: Created by author. 5.1% 2.9% 5.4% 4.0% 50.9 21.8 476.3 386.3 9.9 26.9 3.0 2.7 Roger Barton 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 2020, and Roger, 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 tight again this year. Nonetheless, Roger was delighted with what his company had accomplished. Business was booming. Revenue for 2020 was 15% ahead of 2019, and operating profits were up even more. Roger had been raised 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, Roger began working for his father at the mill. After earning a degree in agricultural economics at Virginia Tech, he married Christine Nelson in 2008. Upon his return to the mill, Roger was made a supervisor. He excelled at his job and was highly respected by everyone at the mill. In 2015, facing the financial needs of an expanding family, he and Christine began exploring employment alternatives. In late 2017, Christine's father offered to sell the couple his wholesale nursery business, Nelson Nurseries, near Lynchburg, Virginia. The business and the opportunity to be near Christine's family appealed to both Christine and Roger. Pooling their savings, the proceeds from the sale of their house, a minority-business development grant, and a sizable personal loan from Christine's father, the Bartons purchased the business. They agreed that Roger would run the nursery's operations and Christine would oversee its finances. Roger 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 the business 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 annuals, perennials, and trees.. Over the previous two years, Roger had increased the number of plant species grown at the nursery by more than 40%. Roger was a people person. His warm personality endeared him to customers and employees alike. With Christine's help, he kept a tight rein on costs. The effect on the businesses' profits was obvious, as its profit margin had increased from 3.1% in 2018 to an expected 5.8% in 2020. Roger was confident that the nursery's overall prospects were robust. Over the previous year Nelson Nurseries 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. With Roger running the business full-time, Christine focused on attending to the needs of their active family and, with the help of two clerks, oversaw the company's books. Roger knew that Christine was concerned about the recent decline in the firm's cash balance to below $10,000. Such a cash level was well under her operating target of 8% of annual revenue. But Christine 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. Christine was happy with the steady margin improvements the business had experienced. Some of the gains were due to Roger's response to a growing demand for more- mature plants. Nurseries were willing to pay premium prices for plants that delivered "instant landscape," and Roger was increasingly shifting the product mix to that line. Christine had recently prepared what she expected to be the end-of-year financial summary (Exhibit 1). To benchmark the company's performance, Christine had used available data for the few publicly traded horticultural producers (Exhibit 2). Roger and Christine agreed that across almost any dimension of profitability and growth, 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 $10.32, currently required for H2A-certified nonimmigrant foreign agricultural workers. There was some debate within the US Congress about the merits of raising this rate. Roger 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. Roger was sure that 2021 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 by buying a neighboring 12-acre parcel of farmland, on which he expected to close next month. But for now, it was Christmas Eve, and Roger was looking forward to taking off work for the entire week. He would enjoy spending time with Christine and the boys. They had much to celebrate for 2020 and much to look forward to in 2021. Most of Nelson's suppliers provided 30-day payment terms, with a 2% discount for payments received within 10 days. 3 As compensation for the Bartons' services to the business, they had drawn an annual salary of $50,000 (itemized as a selling, general, and administrative (SG&A] expense) for each of the previous three years. This amount was effectively the