Butler Lumer Analysis

Butler Lumber Company

by nhsdf | studymode.com

Group:

Lucas Ghiglione - 260460555

Noah Lackstein - 260524490

Kayley Lankinen - 260534412

Elliot Leimer - 260447577

Noah Seltzer - 260532481

Subject:

Butler Lumber Company

Problem:

The Butler Lumber Company does not have adequate cash on hand to manage their operations, and has become reliant on trade credit and sometimes late payment of accounts payable to manage their cashflow. With sales projected to increase by 25% to 35%, the company must decide whether to accept a larger line of credit from Northrop National Bank. Options:

Do nothing, and maintain their current loan with Suburban National Bank Accept the larger loan from Northrop National Bank

Recommendation:

Given the available data, the Butler Lumber Company should accept the loan from Northrop National Bank.

The Butler Lumber Company is in danger of not meeting their short-term liabilities (their credit purchases), due to their illiquidity. This will tarnish their otherwise flawless relationship with suppliers and hinder the company’s expected future growth. Butler Lumber Company is presented with two options to solve their low cash flow issues, both in the forms of external financing. This case analysis will further explore both options, their pros and cons, and devise an informed, reasonable course of action for Butler Lumber Company to solve this dilemma.

Current Situation

In order to examine Butler Lumber Company’s current situation, we used ratio trend analysis from 1988 - 1990.

Liquidity Ratios:

At first glance, the current ratio appears to be in good form with a small decreasing trend from 1988 (1.8) - 1990 (1.45). Though the ratio is decreasing, Current assets are still greater than current liabilities, which gives us the impression of liquidity. However, when one analyzes the quick ratio it is apparent that inventory accounts for a large portion of current assets, and becomes a larger portion over time; the quick ratio has a decreasing trend from 1988 (0.88) - 1990 (0.67). This is worrisome because they have very little cash on hand, and increasing accounts receivables, which points out to a serious liquidity issue.