Clarkson Lumber Manufacturing

Case Overview

Clarkson Lumber Company is a privately owned company, headed by Keith Clarkson who has just bought out his partner’s, Mr. Holtz, interest ($200,000) in the company, which has experienced a rapid growth in its business during recent years. However, despite healthy profits, the company is experiencing a shortage of cash and has found it necessary to increase borrowing from the Suburban National Bank to $399,000 in the spring of 1996; the maximum credit line from this bank is $400,000. Clarkson is staying within the limit by relying heavily on trade credit. Furthermore, Suburban National Bank has asked for Mr. Clarkson to guarantee the loan personally, which has prompted him to look to Northrup National Bank that has offered the company a credit line of $750,000. Mr. Clarkson believes that this credit line will be enough to finance the expected sales of $6.0 million for the company and improve profitability by allowing him to take full advantage of trade discounts; the terms of a trade discount are usually 2 percent 10 net 30. However, during the last two years, Mr. Clarkson has taken very few purchase discounts because of the shortage of funds caused by his purchase of Mr. Holtz’s interest in the business and the additional investments in working capital associated with the company’s increasing sales volume.

Analysis

Although Clarkson Lumber Company has been greatly profitable, we still believe they are not profitable enough to finance their expected sale growth of 32.77 percent; they are in dire need of financing. For instance, from 1993 to 1995 their profit margin has been hovering close to 2 percent. Cost of goods sold has been consistently 75 percent of sales. Return on assets has decreased from 6.5 percent to 4.7 percent. This is due to a large increase of 78 percent in total assets since 1993. Furthermore, the company is keeping a high volume of inventory in stock for about 60 days. Moving on, the company’s accounts receivable has increased significantly by 98 percent since 1993. Thus, the average collection period for the company has also jumped tremendously from 38 to 49 days since 199. All this has contributed to very little cash inflow for Clarkson Lumber Company. In fact, in 1995 cash inflow from