Butler Lumber Case Study

In: Business and Management

Submitted By markk1989
Words 3457
Pages 14
Problems, Options and Recommendations The problem that we have recognized in this case is that Butler Lumber Company does not have enough funds to finance its operations in the future. The company has experienced a shortage in cash and needs to issue debt as it moves forward. The company is also under pressure because of the payment to be made to Mr. Stark for the buyout of his share in the company of $105,000. Although, the majority of this payment has been made, Butler still owes Stark another $35,000 that he intends to finance through another loan. The firm has already been using up its cash reserves to pay back its liabilities, which is not a good sign since cash should be used for investment purposes. As we can see from Exhibit 4 (Cash flow from operations), cash balances have been depleting year by year with a total decrease of $17000 over the years 1988-1990. Butler Lumber has two options to support the company’s operations. The first presents itself in the form of a loan from the Suburban National Bank of $250000, who have asked them to secure the loan with real property, which shows that the company’s risk profile has increased as this bank never asked for any security while making loans in the past. But the problem with this scenario is that the company will need a bigger loan to finance its operations, which the Suburban National Bank will not provide beyond $250000. Therefore another option that the company can consider is to accept Northrop National Banks offer of a loan of $465000 and abide by their terms if they undertake this loan. Hence accepting Northrop’s offer will sever Butler’s relationship with the Suburban bank, but also allow Butler access to more funds than Suburban would have otherwise been able to provide. The risk profile of the company has increased over the years if we look at their current ratio, which has fallen from 1.8 to 1.45,…...

Similar Documents

Butler Lumber Case

...Management Accounting Case (1) Financial Planning: Butler Lumber Valuation 1. Although Mr Butler has seen an increase in his sales for the last few years, there are a few reasons why he needed a loan from the bank to keep his operations going. 1) Shortage of Cash: Despite good profits, Mr. Butler had experienced a shortage of cash from 1988 to 1990. During this period of time, there was a decrease in cash reserves, as well as in inventory turnover, indicating that Mr. Butler’s money had been tied up in his inventory. This can be resolved by working on his receivables turnover ratio, which decreased from 1988 to 1990, as seen in Appendix A. 2) Debt Consolidation: In late 1988, Mr. Butler took a loan of $70,000 that carried an interest rate of 11%. The annual interest payable to the bank compounded to his cash shortage problem. 3) Expansion of operational business: Additional investments in working capital and inventory purchases will be required to keep up with the company’s increasing sales volume. 2. As illustrated in Appendix B, assuming that 1991 sales volume will be $3.6 million, Butler Lumber will only need a loan of roughly $333,600.00 to finance the expected expansion in sales. The company’s estimate of the loan requirements is inaccurate. 3. In the first quarter of 1990, sales were $698,000, approximately 25.91% of the yearly revenue. Based on this ratio, we estimate that Butler Lumber Company will generate approximately......

Words: 620 - Pages: 3

Butler Lumber Case

...BUTLER LUMBER CASE REPORT The Butler Lumber company is facing cash difficulties due to the buyout of Henry Stark’s share and because it is operating a high growth rate. Thus, it is imperative to analyze the various options available to Mark Butler in order to meet the cash needs of the Butler Lumber Company. In order to support the reasoning for our recommendation, we constructed a ratio analysis (Appendix I; Exhibit 1). Even though the firm has realized increasing sales and decreased its operating and cash cycle, other factors were found to have contributed to the shortage of funds. From the analysis, we were able to conclude that the main reasons for the firm’s insufficient funds were due to its slower collection of accounts receivable, higher costs of goods sold, heavy reliance on debt financing and most importantly a growth rate that is not sustainable. From Exhibit 1 in the Appendix, the current and quick ratios have been declining since 1988; furthermore, the quick ratio is less than 1, which indicates that the firm is deeply reliant on its inventory to meet the payments of its current liabilities. This is a problem since more inventory means more cash tied up in less liquid assets, which decreases the firm’s cash.            Secondly, when analyzing the firm’s profitability, ROA increased by 3% from 1989 to 1990, but this was mainly due to the increase in total asset turnover which increased from 3.03 to 3.23 (Exhibit 1).  Another component of ROA,......

Words: 964 - Pages: 4

Buttlers Lumber Case Study

...The maximum loan that the Butler Lumber Company (BLC) could obtain from Suburban National was $250,000 in which his property would be used to secure the loan. Northrop National Bank offered BLC a line of credit of up to $465,000. BLC would have to sever ties with Suburban National if they were to have this LOC extended to them. As Mr. Butlers financial advisor, I would advise him to take the loan in an attempt to grow the business. One alarming fact about his business is the lack of a sales staff, yet the revenue has been able to grow at a fast pace; 18% in 1989, 34% in 1990, 19% in 1991. By adding another an experienced salesman that is working for a base salary plus commission, they can grow the revenues even more. By having this person work on commission, this will eat into the profit margin for the materials he is selling. But the net impact to the BLC will be positive. I would advise Mr. Butler to select the LOC for up to $465,000 because he can take out as little as he needs. He does not need all $465,000 this quarter, but he may need some in the first and last quarters of the year because he obtains 55% of his revenues in the second and third quarters. So it is strategically important for him to have access to this capital because of the nature of his cyclical business. As a banker, I would not grant BLC a LOC for $465,000. This is too much for a company this size, and with such little equity. The bank is too......

Words: 541 - Pages: 3

Butler Lumber Case Study Solution

...Case Study Objective: As Mr. Butler’s financial advisor, would you give urge him to go ahead with, or reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan. The maximum loan that the Butler Lumber Company (BLC) could obtain from Suburban National was $250,000 in which his property would be used to secure the loan. Northrop National Bank offered BLC a line of credit of up to $465,000. BLC would have to sever ties with Suburban National if they were to have this LOC extended to them. As Mr. Butlers financial advisor, I would advise him to take the loan in an attempt to grow the business. One alarming fact about his business is the lack of a sales staff, yet the revenue has been able to grow at a fast pace; 18% in 1989, 34% in 1990, 19% in 1991. By adding another an experienced salesman that is working for a base salary plus commission, they can grow the revenues even more. By having this person work on commission, this will eat into the profit margin for the materials he is selling. But the net impact to the BLC will be positive. I would advise Mr. Butler to select the LOC for up to $465,000 because he can take out as little as he needs. He does not need all $465,000 this quarter, but he may need some in the first and last quarters of the year because he obtains 55% of his revenues in the second and...

Words: 591 - Pages: 3

Butler Lumber

...I. Statement of Financial Problem Butler Lumber Company, a growing, profitable business has exhausted it’s credit limit with its current bank and needs additional capital to: * Continue to fund growth * Consolidate debt * Improve cash flexibility In this case study, I will examine the following problem: During the years of 1988-1990, why has Butler Lumber increased sales volume but experienced a decrease in cash flow? This problem is historical, and I will base my analysis from information contained on the Butler Lumber income statement and balance sheet spanning the years of 1988-1990. II. Financial Analysis Framework To adequately assess the situation, the following ratios will need to be determined to create a framework for analysis: * Liquidity ratio – Will Butler be able to liquidate enough assets to be able to pay off debt as payments are due? A satisfactory liquidity ratio is required if Butler Lumber is to continue operations. * Debt management ratio – What does Butler Lumber’s mix of debt to equity look like? Is the combination right? * Asset management ratio – Does the company have the right amount of assets to offset sales? Is Butler effectively managing its assets? * Profitability ratio – Is the level of sales high enough? Do sales exceed the cost of each unit? Are they achieving an adequate level of profitability? Calculating these ratios will allow for proper application of the framework for analysis. The source of......

Words: 287 - Pages: 2

Butler Lumber Case Study

...Case Analysis: Butler Lumber Company (2011-05-03 06:06:15) 转载▼ 标签:mbacorporatefinancecasestudybutlerlumber财经 | 分类: CorporateFinanceCaseStudy | HARVARD BUSINESS SCHOOL 9-292-013 REV: JANUARY 4, 2002 Butler Lumber Company To examine Butler’s current financial situation and to answer the question of how well Butler is doing are not an easy task. There are many things to look into. Let us start with net working capital.   Net working capital= current assets- current liabilities       | 1988 | 1989 | 1990 | 1991 | current assets | 468 | 596 | 776 | 932 | current liabilities | 260 | 375 | 535 | 690 | net working capital | 208 | 221 | 241 | 242 |   In thousands of dollars   For 1991, only first quarter’s data is provided, so in the following discussion, we us the first quarter’s data to represent year 1991. Using excel, I calculated the net working capital of Butler Lumber Company from year 1988 to year 1991. Net working capital can give us some ideas how much the company’s potential reservoir money is. We see a steady increase in net working capital through these years, which is a good sign. However, merely the absolute numbers are not sufficient to make further judgment. Thus, I make this chart on common size analysis based on the total asset.     net working capital | 208 | 221 | 241 | 242 | total assets | 594 | 736 | 933 | 1094 | net working capital common size | 0.350168 | 0.300272 | 0.258307 | 0.221207 |   In thousands of dollars   From......

Words: 1659 - Pages: 7

Butler Lumber Case Analysis

...Butler Lumber Case Analysis Question 1 Butler Lumber, a retailer of lumber products in the Pacific Northwest area, experienced a time of growth in the spring of 1991 (Harvard College, 2002, p.1). The company looked to take out a loan to grow business operations. The maximum loan offer from Suburban National Bank was $250,000 (Harvard College, 2002, p.1). This loan also required a pledge of property from company owner, Mr. Butler, to secure it. However, Northrop Bank would offer a loan up to $465,000 (Harvard College, 2002, p.1). If he accepted this bigger loan, he would have to cut ties with Suburban National. Butler’s business ran off the ability to obtain resources at such a low rate by buying high quantity (Harvard College, 2002, p.1). The fact that he was only able to borrow up to $250,000 from the bank decreased his ability to buy more resources at a cheaper price and receive the discounts he needed to increase his profit margins with the growing market. He began the business in debt when he bought his partner’s interest in the company with a note payable and his business continued to have small profit margins due to lack of financing. During the years, Mr. Butler had taken few purchase discounts because of the shortage of funds arising from Stark’s investment and to cover working capital with the company’s expected increase in sales. He is unable to grow his cash flow enough to pay of his debts and this is a very dangerous trend. ......

Words: 1791 - Pages: 8

Butler Lumber

...1) Is Butler Lumber Case just a bank lending / finance case? Butler Lumber Case is not just a bank lending / finance case. Though this case requires the financial analysis of the company, we should also consider other factors such as the establishing the long-term relationship between the bank and Butler Lumber Company. Through fostering this long-term relationship, the bank is able to capitalize on Butler Lumber’s growth and cross sell the services to Butler Lumber Company. Additionally, the bank should consider other qualitative factors such as in this case, Butler Lumber has just been incorporated and it is located in a growing suburb of a large city. This represents a growth potential in which the Northrup National Bank could cross sell products. Other qualitative factors may affect the main revenue drivers for the Butler Lumber Company. For example, general economic slowdown may slowdown the rate of increase in sales but it may be protected to some extent from the fluctuations in new housing construction because of the relatively high proportion of its repair business. As such, Butler Lumber Case is not just a bank lending / finance case. 2) How does Butler Lumber Company make money? The company operations were limited to the retail distribution of lumber products in the local area. These include Plywood, moldings, and sash and door products. 3) How is Butler Lumber Company doing financially? Is the business profitable? (You are required to......

Words: 2128 - Pages: 9

Butler Lumber Company Case Study

...BA 5802 Financial Management Case Study 1 Emre BULUT Butler Lumber Company 2056281   |   |   |   |   |   |   | First Quarter |   |   |   |   | 1988 | 1989 | 1990 | 1991 |   | | | | | | | | | | Current Ratio | (CA/CL) | | 1.80 | 1.59 | 1.45 | 1.35 | | Quick Ratio | ((CA-Inv)/CL) | 0.88 | 0.72 | 0.67 | 0.54 | | Inv. Turnover | (Sales/Inv) | 7.10 | 6.17 | 6.44 | 1.29 | | DSO | | (Rec*365/Sales) | 36.78 | 40.25 | 42.95 | 175.38 | | FA Turnover | (Sales/FA) | 13.47 | 14.38 | 17.16 | 4.43 | | TA Turnover | (Sales/TA) | 2.86 | 2.74 | 2.89 | 0.66 | | Debt Ratio | (TL/TA) | | 54.55% | 58.70% | 62.70% | 67.37% | | TIE | | (EBIT/Int Exp) | 3.85 | 3.05 | 2.61 | 2.10 | | EC | | (GP/Int Exp) | | 36.54 | 28.80 | 22.55 | 19.60 | | PM | | (NI/Sales) | 1.83% | 1.69% | 1.63% | 1.25% | | OM | | (EBIT/Sales) | 2.95% | 3.03% | 3.19% | 2.92% | | GPM | | ((Sales-COGS)/Sales) | 27.99% | 28.61% | 27.62% | 27.30% | | BEP | | (EBIT/TA) | | 8.42% | 8.29% | 9.22% | 1.92% | | ROA | | (NI/TA) | | 5.22% | 4.62% | 4.72% | 0.82% | | ROE | | (NI/Com Eq) | 11.48% | 11.18% | 12.64% | 2.52% | | Questions: 1: Why does Mr. Butler have to borrow so much money to support this profitable business? First of all, company is doing well but it has some problems to compensate their short term liabilities. As CR is examined ratio has a decreasing tendency. This is a pointer of money necessity in company. Also although company has a...

Words: 768 - Pages: 4

Butler Lumber

...Shumann Butler Lumber Company Background: Butler Lumber Company had been founded in 1981 in a suburb of a large city in the Pacific Northwest. The company s operations were limited to the retail distribution of lumber products. Their typical products included plywood, moldings, and sash and door products. Despite good profits Butler Lumber Company experienced a shortage in cash and found it necessary to increase its bank loans. Issues: y y Why does a Profitable company such as Butler Lumber need external Financing? Should Butler Lumber Company accept the discount that is being offered from its suppliers? y Project the Butler Lumber Company s balance sheet and Income Statement for all of 1991 under two scenarios If they accept the discount If they don t accept the discount Analysis: Butler Lumber Company is a profitable company anticipating tremendous growth, and typical of a company in this phase of the business cycle, the cash needed to meet obligations outstrips its inflow from operations. Butler s exponential growth has caused them to need external financing, because they can t self-fund their working capital needs. The might be able to mitigate some of this through better inventory management control such as squeezing their suppliers on credit terms or for increased volume discounts. Going forward their fixed costs will also help build economies of scale which should diminish their external financing demands in future fiscal periods. Butler is......

Words: 1036 - Pages: 5

Butler Lumber Company Case Proposal

...Butler Lumber Company Financial Proposal Analysis & Conclusions Based on the analysis on Butler Lumber’s financial statements (Exhibit 1), we conclude that, for sole trader companies like this, it has been growing fast for the past years, as shown in an increase of Sales from 19% in 1989 to 34% in 1990. There is also a slow and steady growth in net income. Butler Lumber uses most of its cash in inventory, occupying 179,000 out of 475,000. Also, stocks’ SAF is positive for 1988-1990 and 1990-1991, indicating that the company has too much inventory. Accounts receivable’s SAF of 1988-1990 and 1990-1991 show a considerable increase, therefore we conclude that the company is giving out a significant amount of credit to its customers. We consider BLC a healthy company with increasing current assets, but due to the fact that it is giving out too much credit to customers, plus too much inventory, Butler Lumber has bad liquidity and turnover. Cash’s SAF shows a negative number brought by decrease in liquidity that avoids its use against contingencies and debt repayment. BLC desires to keep a good relationship with its suppliers. However, right now they have given the company a considerable credit for delayed payment. In order to maintain a solid relationship with its partners, BLC is in great urgency to find other financing sources to pay the credit. This is one of the reasons for Mr. Butler’s desire to borrow money, both to expand his business and to pay the liabilities that...

Words: 1420 - Pages: 6

Butler Lumber

...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 and questions they answer: • Liquidity ratio – current ratio: Will Butler Lumber be able to pay off his debts as they come due? Satisfactory liquidity ratio is necessary if Butler Lumber is to continue its operations. • Asset management ratio: Does Butler Lumber have the appropriate amount of assets versus sales? How effectively is Butler Lumber managing its assets? • Debt management ration: Does Butler Lumber have the right mix of debt and equity? • Profitability Ratios: Are sales high enough? Do sales exceed the unit cost? It is necessary to calculate different types of financial ratios to examine different aspects of Butler Lumber’s operations. Key accounts for sources of funds for......

Words: 1432 - Pages: 6

Butler Lumber

...Butler Lumber Case Study Zachary Scott Brown FIN 6420 – Dr. J. Robert Malko February 4, 2012 I: Statement of Financial Problem: Butler Lumber Company, a rapidly growing lumber products and retail distribution organization, faced a critical challenge that would determine its future success and level of profitability. The company, led by its founder Mark Butler, had a bright future as its products were consistently in demand in both the new construction and repair work fields. However, Butler Lumber faced one major challenge. The challenge that the company was experiencing was a shortage of cash due to restrictions set by its current funding source, Suburban National Bank. Due to these restrictions, Butler Lumber began to explore other funding sources in order to enhance its current business model and satisfy the high demand of its products. As a possible solution, Butler Lumber looked to a larger bank, the Northrop Bank, which had the potential to offer the company $465,000, nearly double the amount offered by its current lender, Suburban National Bank. Although the idea of moving to a heavy hitting lender seemed quite appealing, one major financial problem needed to be addressed. The major financial problem facing Butler Lumber was identifying why the forecasted figures shown on the income statement differ from the results provided on the balance sheet. II: General Framework for Financial Analysis: There are several factors that can contribute to discrepancies or......

Words: 1210 - Pages: 5

Butler Lumber

...The issues presented in the Butler Lumber case deal with the financing of growth. The main problem is that the company needs additional financing due to rapid growth and they are trying to decide whether or not to enter into a loan contract for $465,000 with Northrop National Bank in addition to their already $247,000 loan from Suburban National Bank. However, the Suburban National Bank is also deciding if it should lend the money to Butler Lumber. Suburban anticipated sales in 1991 to be $3.6 million, but according to my calculations the forecasted sales are only $1,672,940 which comes from adding the net sales of $718,000 to the forecasted amount of $954,940 in 1991. Looking at the forecasted income sheet and balance sheet there is an obvious difference of $349,140 between the total assets and total liabilities and so the liability side needs to be increased. The required increase in assets is $361,020 and the spontaneous increase in liabilities is $11,880 coming from the forecasted accrued expenses of $36,000 subtracted from the forecasted accrued expenses of $47,880 to get a total of $11,880. Here is where I hit a road block because I noticed that subtracting $11,880 from $361,020 gives the amount of $349,140 without having to subtract any retained earnings. If it’s possible that 100% of earnings are paid out dividends then this would mathematically be correct, even though it is very unlikely that this is the case. Because this is consistent mathematically I am......

Words: 695 - Pages: 3

Butler Products Case Study

...Butler Products Case Study for DBA 8230 May 8, 2012 Background The Butler family of products produces a wide variety of items. One of the manufacturing companies makes products in three finishing departments (A, B, and C), which have identical assembly operations but package the products differently for different lines of business. Each finishing line packages units as either single or multiple units per package. For allocating overhead, volume is defined in terms machine hours. Each department can package 1,140 single units per hour. Department A has the oldest equipment, which is in the last year of its depreciable life. Department N’s equipment is about half depreciated. Department C’s equipment is in the second year of its life. The budget prepared for each department in 2010 included the following costs, volumes, and overhead rates (given in millions of dollars): | A | B | C | Expected number of units | 73M | 73M | 55M | Fixed overhead | | | | General expense | $1.5M | $2.0M | $1.25M | Rent | $1.5M | $2.0M | $1.75M | Depreciation | $0.5M | $2.0M | $5.0M | Total fixed overhead | $3.5M | $6.0M | $8.0M | Variable overhead | $150/machine hour | $131/machine hour | $150/machine hour | Machine rate | 1,140 units/hour | 1,140 units/hour | 1,140 units/hour | Direct materials | $0.50/unit | $.052/unit | $.55/unit | Direct labor | $.015/unit | $.015/unit | $0.135/unit | The general expense portion of the overhead......

Words: 1136 - Pages: 5