Butler Lumber

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Butler Lumber Case Study

I. Statement of Financial Problem

Butler Lumber Company, a growing profitable business has exhausted its credit limit and the key issues facing it are: 1. Need for additional funds to continue the growth 2. Need to consolidate debt 3. Need to improve cash flexibility.

In this case study I will be discussing following problem: Why has Butler Lumber been profitable in the increasing volume of sales but at the same time it is experiencing cash difficulties in 1988 – 1990? This is a historical problem and my calculations and assumptions are based on income statement and balance sheet for 1988 – 1990.

II. General Framework for Financial Analyses

There are different financial ratios
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Nonfinancial working capital represents notes payable, accounts payable and accrued expenses subtracted from accounts receivable and inventory.

After examining Exhibit # 2 we can identify following sources and uses of funds:

Sources of funds are: Uses of funds are:

- Retained earnings - Increase in A/R

- Decrease in cash accounts - Increase in inventory

- Increase in A/P - Increase in fixed asset accounts

- Increase in accrued expenses - Buyout of Mr. Stark

- borrowing from bank. - Decrease in long term debt.

If A/P increases from one year to the next, that means that the difference between the two amounts is cash that was available for current use. That is, instead of paying cash, whatever was purchased was put on an account. On the other hand, A/R is considered a use of cash because for every dollar that should be coming in to the company from those who owe the company money, that cash has been delayed for a collection time period. Therefore, the company does not have the money to use for its own operations.

IV. Assumptions

Assumptions in developing a funds flow statements as (shown in exhibit # 2) are that data presented in the case are accurate. Butler Lumber is dealing with changes in business risk. Increasing the internal financial risk by borrowing more money from the bank, Butler Lumber is also increasing total risk of the company.

Conclussions and

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