Butler Lumber Company Case Study

This essay sample on Butler Lumber Company Case Study provides all necessary basic information on this matter, including the most common “for and against” arguments. Below are the introduction, body and conclusion parts of this essay.

Why has Butler Lumber borrowed increasing amounts despite its consistent profitability? How has Mr.. Butler met the financing needs of the company during the period 1 988 through 1 990? (It would be helpful to develop a cash flow analysis (use vs.. Source) and the cash flow statement based upon the income statement and the balance sheet provided in the case for the period of 1988 to 1990.

Through the period of 1988 to 1 990 Mark Butler has met the needs of financing through decreasing the amount of cash the company carries, by increasing bank loans, by increasing the size of accounts payable, and by carrying net income over into retained earnings. The needs of this cash was generated by the loan to Mr.. Stark as M. B. Needed this money to buy out Mr.

. Stark’s share in the company, an increase in account receivable, an increase in inventories, and an increase in fixed assets. Working capital turned out to make up a use Of 68% during the years 1 988 to 1990.

The buy out of Mr.. Stark made up 22% of the use of cash. Source bank note payable 49%, trading credit 28%, retained earnings 16%. All in all Mr.. Butler has been using the wrong sort of financing to raise funds. If you were to make a comparison as to how Mr.. Butler has been generating funds thus far it would be like financing a mortgage with a credit card.

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2. Has the financial strength of Butler Lumber improved or deteriorated? The ratios show that the strength of Butler Lumber is slowly deteriorating. Their current ratio has been slowly going down from 1. To 1 2, if this continues it will only be a matter often until Butler Lumber will no longer be able to cover their current liabilities with their current assets. Along with this the company is growing more and more leveraged from 54. 5% in 1988 to 71. % in 1992. As their working capital decreased through the years and into the projection BAL average payment period is increasing from 35 days to 47 days. It will not be long until their vendors grow tired of the slow payments, not to mention the fact that BAL is not taking advantage of the vendors 2% discount by paying in ten days from the purchase.

Butler Lumber Case Solution

Bless times interest earned is growing smaller also. In 1988 Bless TIE figure was 3. 8 but now the estimated figure for 1992 is 1. 9. This means that Bless BIT is becoming increasingly lower relative to the interest that they must pay out on loans. . Does rapid sales growth always result in a need for substantial external finance? (Hints: exam asset management, does the efficiency of using assets at Butler align with its rapid sales growth? ) In this case MBA needed a loan to buy out Mr..

Starks interest so that in itself caused a need for external financing. Generally when companies experience rapid sales growth they do need substantial external financing. As sales increase accounts such as A/P, A/ R, and inventory always increase also, which creates a demand for more funds, for instance in net working capital. This is needed so that the business can operate smoothly, make their payments on time, absorb increases in accrued expenses, and meet the needs of countless other needs of cash that come along with increases in sales.

The speed at which sales are growing is the reason why a company needs external financing, assuming that the company doesn’t have a rich uncle with 4. How attractive is it to take the trade discounts? A 2% percent discount will result in a savings of $41000 in 1991 and $60,000 in 1 992, which will increase net income significantly to 58,000 in 1991 and $73,000 in 1992. The increased savings in net income will show up in retained earnings and will provide a source of cash for the coming year which will in turn reduce the amount of external financing that the company needs.

The annual cost of not taking this discount works out to be 20% – Once again this shows that Mr.. Butler is not using the best source of financing because he could take out a loan at a much lower rate of interest to pay his bills in 10 days and save quite a bit of money. 5. Do you agree with Mr.. Butler’s estimate of the company’s loan requirements? That is, will a credit line of $465,000 be sufficient to meet the Meany’s needs beyond 1 991 if it takes the trade discounts? How much will Mr..

Butler need to finance the expected expansion in sales to $3. 6 million in 1991 and to take all trade discounts? (Develop projected income statement and balance sheet, and then estimate the financial needs. ) If MBA takes the 465,000 line of credit and does not take the trade discount he will be able to operate through the year of 1991 but he will need even more money to continue into 1992. By not taking the trade discount BAL will not be running very efficiently and their current ratio will continue to get worse. If Mr..

Butler does take the trade discount the projected external financing for 1991 is $666,000 so it seems that the 465 thousand line of credit will not be enough for BAL to continue experiencing the rapid growth. 6. Would you, as Mr.. Dodge, agree to lend Butler the money needed? This is a tough call based just upon these numbers. It seems a bit risky for the bank to extend this financing to BAL. I do not have industry figures or what the current home building growth is projected to be. It mentions in the book that MBA thinks that even if home building slows residential remodeling will continue to rive his sales.

I think that Mr.. Dodge should recommend BAL to scale back sales growth to a more manageable rate. 33% sales growth per year is very high. History shows us growth at this rate never continues year after year. Additionally, growth at this rate generally causes financial problems and lower chances for the company’s survival over the long run. As things are going right now Mr.. Dodge probably would not grant this loan. 7. What are the alternatives open to Mr.. Butler if Mr.. Dodge refuses his request for an increased credit line?