Butler Lumber Case Notes

BUTLER LUMBER CASE ANALYSIS

1. Main uses of funds: Account receivables, inventory and payment of Mr. Stark

2. Sources of funds: Bank loans and account payables

3. Financial Highlights:

a. Cash has been decreasing from 1988 till 1990

b. Average day payables during the last 3 years: 45 days (Butler forfeited the 2% discount)

c. Days account receivables increased to 43 days while cash reserves decreased

d. Days tied up in inventory: around 78 days

e. As the company grows, the operating expenses and CAPEX has grown

f. Interest of Stark's was bought in 1988 with long term loans

g. The trends of Current ratio, quick ratio and cash ratio have been decreasing throughout the year (Indicating lower liquidity)

h. Interest expenses have been increasing (times interest earned decreased from 3.85 to 2.61)

i. Days inventory has been increasing: taking too long to turn the inventory

j. Profit margin: decreasing trend from 1.83 x to 1.63 x (net income/sales).

k. Slow growth in NI and decrease in cash (reaching $389K in 1st Q1 of 1991 almost covers half the debt)

4. Client is estimating an additional need for $465K. Proforma Balance and income statement were conducted showing an EFN of $376K. This needed amount will be for expansion and consolidation of the loan. While consolidation is possible and client will be offered a lower interest rate, Butler will be highly leveraged and may fall in the debt trap

5. Banker