Clarkson Lumber Company

2244 WordsApr 16, 20089 Pages
Mr. George Dodge, Clarkson Lumber Company is doing well but there is the issue of whether or not there is too high a risk in granting the request for the $750,000 line of credit. There are many supporting strong points but it also has some problems to work out. This is a company that has many good characteristics and looks promising but needs the extra money to pay off loans, inventory, and supplies. I recommend this company to receive the line of credit. Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands. Current ratio and quick ratio are really low and have been decreasing. For 1995, the current ratio is 1.15:1, which is less than the…show more content…
The average collection period of accounts receivable is increasing. Customers, as stated before, are given the opportunity to pay later. Instead of paying every 34.1 days like the average, Clarkson customers have been able to pay back in about 49 days. As for the average payment period, Clarkson has been testing its boundaries and bargaining power to see how many days he could take to pay back his purchases. For instance, he took 35 days in 1993, 45 days in 1994, and 38 days in 1995. It seems that he tried to take longer but then the suppliers may have talked to him because he improved to 38 days, however, it is still an extra 8 days from the typical 30 day invoice. The problem with this is that he isn’t taking advantage of the 2% discount which is evident that many companies do since the industry average is only 16.3 days. However, at this point it doesn’t seem very possible since the loan limit and lack of cash make it hard to take advantage of this situation. Based on the pro forma sheets there is an additional $251,000 needed to attain the goal of $5.5 million in sales. Also, since part of the agreement is to break off from Suburban National Bank, the line of credit has to cover the 399,000 covered by the loan. Therefore, the amount needed is $650,000 as seen in Exhibit 6. The credit line would also help to pay for inventory instead of having to go on trade and the notes payable for Mr. Holtz which is supposed to

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