Clarkson Lumber Company

Clarkson Lumber Company was founded in 1981 by Mr. Clarkson and is located in Pacific Northwest. In 1995, the company had net sales of 4.5M, and has been growing at an average growth rate of 25% year over year. Historically, the company heavily relied on the short term financing from Suburban National bank and trade credits from the suppliers. However, as the company sales started to grow at a higher rate, additional need for networking capital went up. Suburban National bank, being a small bank with low risk appetite couldn't support the growth financing needs of Clarkson Lumber beyond $400,000. In 1996, Clarkson Lumber has been left with two options to address the financing concerns. The company either had to cut back its growth or partner with a bank like Northrup National, which is willing to increase credit limit to finance the additional networking capital needed.

During the period 1993-1995, Clarkson Lumber experienced tremendous sales growth. Exhibit 2 shows that on average the company was able to maintain its net profit margins at 1.9%, debt/equity of 2.86 and turnover at 2.98. Clarkson's cash balance increased year over year and shareholders received a return on equity of 15.8% on average showing that the company performed extremely well during this period. However, Mr. Clarkson had to rely heavily on debt during this period to finance increase in net working capital. For example in 1995, Mr. Clarkson had to borrow $360,000 from the Bank. In addition, Mr. Clarkson had to seek trade credit in the amounts of $123,000 dollars from the suppliers. Accordingly Exhibit 2 shows how the company's liquidation ratios and leverage ratios have been impacted negatively during these years because of the increased leverage used to support growth.

Exhibit 1 shows that to support the expected expansion in sales to 5.5 million in 1996, Clarkson Lumber, would require $224,000 dollars in additional funding. As ties with the current bank