Butler Lumber Company Essay

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Butler Lumber Company

Background: Butler Lumber Company was founded in 1981, in a large city in the Pacific Northwest. Typical products of the company included plywood, moldings, and sash and door products. After a rapid growth in its business during recent years, the company in the spring of 1991 anticipated a further substantial increase in sales. Despite good profits the company experienced a shortage in cash and found it necessary to increase its bank borrowings.

Issues:
• Butler Lumber Company is a profitable company. Why do they need external financing?
• Butler Lumber Company is being offered a discount from its suppliers. Should they take the discount?
• Project their Income Statement and balance sheet for all of 1991.
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This signals that although company is profitable but the retained earnings are not enough to fuel the exponential growth of the company. Payable period increased from 35 days in 1989 to 45 days in 1990(Exhibit 2), which shows that the company is lagging behind the standard due date of 30 days. This sole dependency on accounts payable for the uses of cash will make the situation worse. Therefore for additional inventory and accounts receivable to sustain the growth company needs external financing from the bank.
Also current ratio of the company during 1988-1990 (exhibit 3) indicates that liquidity position of the company is deteriorating as ratio is falling from 1.80% in 1998, to 1.59% in 1989 and finally reaching 1.45% in 1990. Similar trends are seen in the quick ratio as it has descended from 0.88% in 1988 to 0.67% in 1990 (exhibit 3). Days sales outstanding represent the number of day’s sales remains outstanding it has shown a substantial increase for 36.78 days in 1988 to 42.95 days in 1999 (exhibit 3), giving signals that the company is fueling its growth from cash crunch.
Hence to fuel their growth of 40%, the company needs external financing.

As noted above we decided that Butler Lumber Company should go for the discount.
In case of the company not going for the discount the pro forma income statements and balance sheet of the company represent the following out come in the without discount scenario.
As we see in exhibit 1 in the income

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