Butler Lumber Company Essay

Decent Essays

It seems to us that Butler has a decision to make. The problem appears to be whether to accept a new relationship or to stay with the present bank under the current borrowing limit. In order to know which solution is better we are going to create a pro-forma balance sheet and an income statement. We are going to look into purchases and calculate the amount, which represents his ten-day spending on purchases. We are going to assume that he lowers his accounts payable to that amount. In order to forecast some of the figures we attached the common size balance sheet and income statement. The sales amount for the year of 1991 are going to be assumed at 3,600,000 while relying on banks estimate.
While projecting the income statement we …show more content…

In order to bring this company into a good standing Mr. Butler will have to make some personal sacrifices, though they likely will reimburse themselves in the future because he is making more money then he ever did and that is likely to continue. Knowing Mr. Butler’s personal situation I think that it will be best to refinance his home and pull out the equity. We know that his wife has a half interest in the house, which is worth about 55,000 that tell us the entire equity position in the house is about 110,000. Luckily for Mr. Butler his shortage in business “refinancing” is 572,450 – 465,000 = 107,450 which can be covered with his house equity, while Mr. Butler and his family will have the 46,000 profit for their living expenses.
While forecasting the assets part of the balance sheet we saw that Mr. Butler continually trying to lower his cash position as a matter of fact reduction in cash relative to sales went from 3.41% in 1988 to 2.38 to 1.52! In this illustration we see a reduction of over 30% from year to year. However we realize that such reduction rate is impossible to have for prolonged period of time we are going to assume an additional 10% reduction bringing our cash to about 1.37% of sales. Further we are assuming the A/R and inventory to be the same relative to sales and property to remain the same as last year since no purchases or construction were

Get Access