Butler Lumber Company Case Study Essay

Summary of Facts. pantryman pound up fraternity is a Pacific Northwest based lumber distri howeveror that sells plywood, moldings, and sash and entrance products. The sole owner of butler t angiotensin converting enzyme is Mark butler, accompanied by one administrative assistant and ten employees who focus on repairs and struggle intensive work. Because of pantryman baseball bats competitive price scheme, it has seen quick step-up in the past few years. ascribable to the rapid appendage and a shortage of property in in 1990, pantryman quality Company is seeking to take out an additional loan in secern for the stock to sustain itself and grow in the coming years. butler beat has the option to accept a loan of $250,000 from suburban National af sozzled, or accept an unsecured revolving 90-day transmission line of $465,000 at 10.5% interest from Northrop National Bank. If Mr. pantryman decides to accept the note from Northrop National bank, it result sever the exi sting ties with suburban National Bank and a new relationship must be maintained.Problem. If Mr. pantryman accepts the loan from suburban National Bank, he must allot to a secured loan that is backed by his real property that give act as collateral for the agreed amount of $250,000. Due to Suburban National Banks constraints, Mr. pantryman is looking to find a new banking relationship that would allow him to negotiate a much bigger unsecured loan. The amount of the loan offered by Suburban National Bank has made Mr. pantryman realize the keep companys growth dominance increase in sales, but in addition realize the increase in debt. Since he is limited on his loan and has little change on hand, he has turned to trade credit for the past few years. As consultants, we will investigate the following four key issues * Should Butler lumber sever ties with Suburban National bank in recount to compass a bigger loan from Northrop National Bank? * Why does Butler beat arrive a bills shortage problem to nonplus with, and are they shortly using their existing descents efficiently?* How much additional livelihood does Butler timberland destiny, and will they continue to make level much in the future? * What sort of implications does the firms growth suggest? * Are at that place Alternative solutions to Butler pounds cash shortage problems? abridgment. The need for cash is clear however, there could be multiple opportunities to raise the great(p) that is needed. It is imperative that Butler Lumber takes into consideration the costs associated with evaluate remote funding, and in turn be satisfactory to assess whether or not it is the best solution. If relying on external financial support is not plausible, Mr. Butler will see to search for selection methods to grow his business whether its finding a different financing solution or a way to generate cash by altering management activities.As we assess Butler Lumbers operations from 1988 t o 1990, it is clear that his reliance on trade credit and a specific focus on having a very competitive pricing schema has allowed the company to generate revenue up to this point. Although the company was able to generate revenue at an increasing rate during the given years, Butler Lumber was unable to accumulate any cash in order to fund operations moving forward. We will start by assessing one of the two immediately available options presented for Butler Lumber Butler Lumber can remain with Suburban National Bank by accepting their loan offer of $250,000. The only apparent advantage of this option lies exclusively in the fact that the relationship with the bank already exists. The disadvantages are seen in the possibility that Butler Lumber will need additional financing past the initial loan amount, and the offered loan is now secured (backed by Mr. Butlers real property), signaling that the bank has doubts that Butler Lumber will make back the loan amount.Though Butler may be capable of repaying the amount, it is inevitable that the company will need more financing. Due to the banks recent focus on the riskiness of Butler Lumber, this may alter their ability to receive more funding from Suburban National Bank. Mr. Butler could alternatively choose to take the unsecured revolving 90-day note of $465,000 at 10.5% interest from Northrop National Bank. The apparent advantages are it is a more flexible option, it is an unsecured loan that requires no collateral from Mr. Butler, and it is of a larger amount. The big disadvantages are the termination of the banking relationship between Butler Lumber and Suburban National Bank, and the increased interest expense on the loan. another(prenominal) disadvantage of establishing a LOC with Northrop National Bank is the possibility of restrictions on the company stating that the net working capital be maintained at a level agreed upon by some(prenominal) parties and any increase in fixed assets with approval by North rop.Also there would be limitations on withdrawals of funds from the business by Mr. Butler. Another concern with the loan is that Butler Lumber would need to draw additional loans from Northrop because the company is unable to pay back the loan amount within the 90 day breaker point due to the lack of cash and liquid assets. -Why does Butler Lumber have a cash shortage problem to begin with ,and are they surely using their existing funds efficiently? The Sources and Uses of Funds brings forth a snapshot of the companys cash flows and illustrates the reason behind Butler Lumbers cash deficit. For the past two years, Butler Lumber has generated negative cash flow from operations, which is alarming for the firm. presumption the typical business model of a growing firm, Butler Lumber has seen increases in both the descent and receivable accounts.This makes sense because the more customers Mr. Butler has, the more inventory he needs to have on hand and given his fairly lackadaisica l approach on payment collection, the amount of receivables is expected as well. This could be an issue for the firm, but if Mr. Butler has a strategy to fund operations until they are able to generate more cash, it will not break the firm. As inventory and receivables grow, an area to hone in on is whether or not these accounts are being turned over in a timely, progressive manner. As seen in the Asset Utilization Analysis table, the ratios for both receivable and inventory indicate that it is taking a longitudinal period of time to collect money and a is holding on to inventory for much time-consuming (nearly 15% and 10% longer, respectively).It is clear that Butler Lumber is not maximizing operational efficiency and will fall down extra costs as a result. -How much additional funding does Butler Lumber need, and will the firm continue to need even more in the future? After analyzing and projecting Butler Lumbers 1991 Pro Forma Balance Sheet, we have decided to separate the pro jections when considering the current due policy and also considering discounts. We have concluded that Butler Lumber will need additional funding of $409,000 under the current payables policy, and including corrupt discounts, they will need $658,000 (seen in Exhibit 1).These figures indicate exactly how Mr. Butler has been operating, relying on specific payment terms with his suppliers and customers. Mr. Butler is using his accounts payable as a sort of leverage (funding) while he searches for external financing, which is quantitatively laid out in Exhibit 4. So the psyche becomes whether Mr. Butler should take advantage of the 2% purchase discount or continue to rely on the suppliers payment flexibility. The pro-forma analysis we generated is based on recent percent of sales from the years 1988-1990. -What sort of implications does the firms growth suggest?NEED SOMETHING ABOUT HOW THE SALES GROWTH OVERSHOOTS THE sustainable GROWTH-Are there Alternative solutions to Butler Lumbe rs cash shortage problems? If Mr. Butler does not or cannot obtain the loan by means of Northrop National bank, an alternative option is Recourse Factoring. Recourse Factoring is the selling off of Accounts receivables where the selling company is fluid responsible in the offspring of receivable default. A factor company purchases receivables from other companies and provides the necessary capital for a small fee. This can be very beneficial for companies experiencing problems with cash flows. This could be a potential option for Butler Lumber because they have slow paying clients and an extensive cash shortage problem.Butlers Receivable turnover has decreased from 9.92 in 1988 to 8.5 in 1991 indicating it is taking longer to recover much needed cash. If Butler was able to factor away their receivables they would have more working capital, a flexible funding course of instruction that will increase only as their sales increase and also would help Butler take advantage of purch ase discounts. If Butler set a Factoring company to take on 75% of their receivables , $317,000 cash would be freed up and eliminate the need for Additional funding. Even if Butler paid a small 2% factoring fee they would still easily be able to maintain their rapid rate of growth with the current $250,000 of funding through Suburban National Bank.Recommendation Given the analysis of the firm, in order for the firm to continue it will need external financing. The recommendation that we give to Mr. Butler is that he accepts the LOC from Northrop National Bank, but only if the loan does not include any negative covenants such(prenominal) as restrictions on the sale of assets, engaging in other businesses, and unpaid prepayment of other indebtedness. This financing is needed because the expected sales growth exceeds the firms sustainable growth rate and leads to a negative cash flow because of the trends Mr. Butler has displayed regarding his payables and receivables.