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Butler Lumber

ByGroup 6

Case overview

Butler Lumber Company, a growing profitable business has exhausted its credit limit and the key issues facing it are: a) Need for additional funds to expand b) Improve cash flexibility c) Need to consolidate debt. It was found that though there are liquidity issues but BLC still has bright prospects considering the growing industry and target market i.e. the repairs market

Question 1
Why does Mr Butler have to borrow so much money to support this profitable business?

Answer 1
Inventories and accounts receivable are why money is needed. Bank debt and accounts payable are sources of the money.

Cash reserves decreased from 1988-1990 From 1988-1990 Butler averaged 44.6 days to pay vendors and forfeited 2% discount Day sales outstanding increased to 42.9 and decreased cash available

Money was tied up in inventory. Day's sales in inventory averaged 77.5. 6. Increased accrued expenses and capital expenditures had to be made to keep up with growth 7. Interest in Henry Stark was bought out in 1988 with long term debt

Ratios
Liquidity Ratios Current Ratio
Current Assets Current Liabilities Current Assets - Inventory Current Liabilities Cash Current Liabilities

1988 1.8

1989 1.59

1990 1.45

1991 1Q 1.35 Times

Comments Trend is getting worse

Quick Ratio

0.88

0.72

0.67

0.55

Times

Trend is getting worse

Cash Ratio Financial Leverage Ratios Times Interest Earned Number of Days Payable Asset Utilization Ratios Inventory Turnover Days Sales Inventory

0.22

0.13

0.08

0.05

Times

Trend is getting worse

EBIT Interest Accounts Payable Annual Purchases

3.85 35

3.05 46

2.61 46

2.1

Times Days

Interest expense is increasing Good position - helping cash flow

Cost of Goods Sold Inventory 365 Days Inventory Turnover Sales Accounts Receivable 365 Days Receivables Turnover Net Income Sales

5.11 71.43

4.41 82.77

4.67 78.16

0.93 98.12

Times Days

Anticipated sales is increasing inventory on hand Taking longer to turn inventory

Receivables Turnover Days Sales in A/R Profitability Ratios Profit Margin

9.92 36.79

9.07 40.24

8.5 42.94

2.08 43.89

Times Days Taking longer to receive payment

1.83

1.69

1.63

Percent Decreasing trend is a concern

Question 2
Do you agree with his estimate of the companys loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)

LOAN REQUIREMENT

Company Estimate- $465,000

Group Estimate- $370,000

The forecast of Butler Lumber Companys short-term loan requirements are appropriate. According to Pro Forma Balance Sheet in 1991, the total amount of bank notes payable of Butler Lumber Company is $370,000. This loan amount would help the company to expand its operational business and eliminate its trade debt. The total amount of $465,000 is not necessary for the spring quarter. LOC helpful in first and last quarter as 55% of sales achieved in 2nd and 3rd quarter The current bank will not offer the additional funding, which would result in the discussions with Northrop National Bank. So it is strategically important for him to have access to this capital because of the nature of his cyclical business.

Calculations
o sal s
Cash Accounts receivable, net Inventory Current assets Property, net Total assets Notes payable, bank Notes payable, Mr. Stark Notes Payable, trade Accounts payable Accrued expenses Long-term debt, current portion Current liabilities Long-term debt Total liabilities Net worth Total liabilities and net worth 58 171 239 468 126 594 3.4% 10.1% 14.1% 27.6% 7.4% 35.0%

1989 % o sals
49 222 325 596 140 736 146 2.4% 11.0% 16.1% 29.6% 7.0% 0 7.3%

1990 % o sals
41 317 418 776 157 933 233 1.5% 11.8% 15.5% 28.8% 5.8% 34.6% 8.6%

Average
2.5% 11.0% 15.2% 28.7% 6.7% 23.2%
5.3%

Projct 1991
88 394 549 1,032 157

1,189 370
0

105

6.2%

124 24 7 260 64 324 270 594

7.3% 1.4% 0.4% 15.3% 3.8% 19.1% 15.9% 35.0%

192 30 7 375 57 432 304 736

9.5% 1.5% 0.3% 18.6% 2.8% 21.5% 15.1% 36.6%

256 39 7 535 50 585 348 933

9.5% 1.4% 0.3% 19.9% 1.9% 21.7% 12.9% 34.6%

8.8% 1.5%
0.3% 17.9% 2.8% 20.8% 14.6% 35.4%

316 52 7 745 43 788 401

1,189

BLC opts for additional debt financing: BLC will have more liquidity and can prepare for anticipated expansion. Debt consolidation is possible. Higher level of ownership can be maintained and BLC will get a lower interest rate. The risk is that the company will become highly leveraged and may fall into a debt trap. Mr. Butler needs a larger credit line of $370,000 to expand and consolidate. From Mr. Dodges point of view, the loan should be approved based on anticipated sales, profitability and financial pro ections but must be backed by collateral and a check on Inventory turnover and Days Sales Outstanding must be applicable.

Question 3
As Mr Butlers financial adviser ,would you urge him to go ahead with ,or to reconsider his anticipated expansion and his plans for additional debt financing? As the banker ,would you approve Mr Butlers loan request and if so ,what conditions would you put on the loan?

Banker Not grand LOC of $465,000.


 Little equity  aggressive with its forecast $3.6 million in 1991  We estimate $3.2 million in revenue in 1991, $400,000 less than what the bank forecasted.  margins are not great for this industry, and BLC is no exception
($3.2m by taking the 1st quarter revenue of $718,000 which is historically approximately 22.5% of the yearly revenue.) in 1989, $44k in 1990, and an estimated $49k in 1991)

($31k in 1988, $34k

 The growth in assets is increasing with a considerable amount from 23.91% in 1989 to 26.77% in 1990. Besides, the return on sale (margin) and asset turnover are at stables rates.  We would consider granting this company a smaller LOC with the similar stipulations of maintaining an appropriate working capital amount, fixed asset purchases would need bank approval and that Butler would put up personal property and his insurance policy as collateral for the loans that the business takes.

Suggestions Account payable: Utilized discount Account receivable: Bring collection time down

Banker: Refinance long-term debt . 2nd charge on assets Assets collateralize note Restrict distributions and salary Approval of capital expenditures