Mr. Clarkson Case Summary

| In a sole proprietorship, the business and single owner are one in the same. A single owner makes all decisions with regard to the business and the single owner retains all profits earned by the business. The single owner is also responsible/liable for all debts and obligations of the business on a personal level.

In conclusion Clarkson Lumber would need an estimated $833,000 in additional financing as shown in exhibit B-2. Therefore, Clarkson Lumber would not be able to expand in 1996.

Sole proprietorship: Is the simplest and most common business structure. There is no legal distinction between the proprietor and the business, which means it is autonomous. You are entitled to all profits and responsible for all your business's losses and liabilities.

Higher credit limits given to the distributors also implies a high possibility of decrease in B&L’s operational cash flow (increase in AR)

AS MR. WILSON 'S FINANCIAL ADVISER, WOULD YOU URGE HIM TO GO AHEAD WITH, OR TO RECONSIDER, HIS ANTICIPATED EXPANSION AND HIS PLANS FOR ADDITIONAL DEBT FINANCING ?

The major risks would be that Hampton is not only not able the new loan, but also that the repayment of the 1million will not take place.

leverage increases, interest rate on the total debt will increase. The Company is considering the

No, Mr. Clarkson’s estimation for loan requirements ($ 750K) is not enough. He needs to borrow more than $ 750K. As you can see from our 1996 pro-forma Balance Sheet (with discount, without discount, respectively), in the both of cases, the company still needs more than $750K from bank to meet their financial needs. In case of not taking all trade discount, (1996 pro-forma without discount) the company needs to borrow $ $905K, on the other hand, in no trade discount case, the company even needs more money ($1,112K) to finance their expected expansion. (Please refer to attached excel file for 1996 pro forma B/S and I/S.)

* Single Ownership - The single individual always owns sole proprietorship form of the business. The individual owns all assets and properties of the business and bears the risk of losing or gaining from the business.

The Lawsons’ efficiency ratios are another section the bank will find troubling. The company’s age of payables has nearly tripled over the last four years. This can be detrimental to the company’s image and reliability including their reliability toward the bank if granted the loan. Along with increasing age of payables is increasing age of receivables and age of inventory. Indicating that Mr. Mackay is taking longer to collect his receivables and that he has purchased too much inventory. Too much inventory results can result in further issues

The company lost money almost every year since its leveraged buyout by Coniston Partners in 1989. The income generated was not sufficient to service the interest expenses of the company which stood at $2.62B in 1996. From Exhibit 1, we can say that interest coverage ratio computed as EBIT / Interest Expense was 1.31 in 1989 and has been decreasing over years and currently stands at 0.59. This raises a question of how the company can meet its interest payments without raising cash or selling assets.

The company currently faces serious financial challenges. It was struggling with declining sales and increasing costs. Since 2004, revenues had fallen by more than 40% while costs especially for employees health insurance, maintenance, and utilities climbed. Credits and loans had been borrowed to

b. The company may be able to avoid bankruptcy but it will be hard. They will need to do several things.

company had experienced a shortage of cash and had found it necessary to increase its borrowing

Due to high investment in fixed asset the firm also need a high amount of debt in order to cover its expenses so the smooth run of business.