Clarkson Lumber Company Case Study

Jacob M. Shannon

MBA 623

Walsh University

14 July 2013

Clarkson Lumber Case

I. Overview and Introduction

The Clarkson Lumber Company is a classic case of a small, private company rapidly growing and not having a sufficient cash flow to sustain operations with the increase in expected future sales. First, there needs to be an analysis of the events and strategies that have been implemented which affect the company’s financials. The owner, Keith Clarkson, bought out his partners “interest” in the company by issuing a note of $200,000 at 11% interest. The owner issued the note so there is sufficient time to arrange the necessary financing to be the sole owner in the company. The company has been managed efficiently by analysis of the financials, with sales expected to reach 5.5 million in 1996. With this increase in sales, the company needs external funding to finance the operations necessary to execute the expected sales volume. The external funding has also become an issue for the company. The current relationship they have with Suburban Bank only allows a borrowing of 400,000, which the company has already reached. Subsequently, Clarkson Lumber is in arrangements for a new relationship with Northrup Bank, allowing a borrowing limit of $750,000. This new financial relationship will stop any form of business between Clarkson Lumber and Suburban Bank. The question at hand is, should Clarkson agree to external funding with Northrup Bank? Is it a financially feasible move?

II. Analysis of Financials

If the Clarkson Lumber Company has been so profitable, why is there a need for burrowing? There are several reasons of why the company needs external funding. Analyzing

Exhibit 1 (Income Statement) reveals some of the elements of why the company is coming up on the shorter end cash flow wise. There are two important elements to note, Net Sales and Cost of Goods Sold. In 1993, the company took in $2,921,000 in sales, where Cost of Goods Sold was $2,202,000. This creates a profit margin of 25% before operating expenses. The gross profit recorded was $719,000 (the 25%), however, with operating, tax, and interest expense only leaves $60,000 in net income. Compare this with each subsequent year and one will find that the cost of goods sold is increasing at a much faster rate than the company’s sales volume. Ultimately, the company isn’t improving profit margins enough to retain enough net income to finance increasing sales figures. Another element to analyze is the increase in operating expenses. As the sales volume increases, the operating expenses are also increasing at a fast rate, narrowing the margin and retained net profits.