Butler Lumber Company Case

Case Study

Butler Lumber Company

1. Is the business doing well? What evidence from Butler's financials leads you to your conclusion?

I consider Butler Lumber a healthy company with increasing current assets, but Butler Lumber has bad liquidity and turnover. Butler Lumber does not have enough funds to finance its operations in the future.

From Butler’s financials, we can find:

1. Based on the analysis on Butler Lumber’s financial statements, we conclude that, it has been growing fast for the past years, as shown in an increase of net sales from 1,697 in 1989 to 2,694 in 1990. There is also a slow and steady growth in net income.
2. Regarding current liabilities, the Balance Sheet shows an increment from 253,000 to a more-then-doubled 683,000. Currently Butler is attempting to ask for Northrop Bank credit of 465,000 to pay the previous debt and to expand its business.
3. By looking at the operational expense, we can see a notable growth from 425,000 in 1988 to 658,000 in 1990, this indicate that Butler is hiring too many staff but operating inefficiently.
4. The company is under pressure because of the payment to be made to Stark for the buyout of his share in the company of $105,000. Butler still owes Stark another $35,000 that he intends to finance through another loan.

2. Why does Mr. Butler have to borrow so much to support this profitable business?

In order to maintain a solid relationship with its partners, Butler is in great urgency to find other financing sources to pay the credit. The firm has already been using up its cash reserves to pay back its liabilities, which is not a good sign since cash should be used for investment purposes. This is one of the reasons for Mr. Butler’s desire to borrow money, both to expand his business and to pay the liabilities that are maturing very soon.