Butler Lumber Company: Following Questions Are Answered in This Case Study Solution

Butler Lumber Company
1184 Words (3 Pages)

Authors: Thomas R. Piper
Publisher: Harvard:292013-PDF-ENG
This case solution includes an Excel file.
This case solution includes a Word file.
Mr. Butler is considering the offer that Northrop Bank has extended to him for the credit
line of $465k. Currently Butler Lumber Company has credit agreements with Sub Urban
National Bank with a cap of $250k. While Butler has managed to keep his funds
requirement below $250k, the recent growth in sales has led to an increased
requirement of funds. Although the business is running profitably, the management of
cash is posing problems for the business. Butler utilizes the trade discounts which come
with purchasing larger quantities. It is advised that Butler reforms his financial strategy,
make his treasury management efficient and reconsider his expansion plans.
Following questions are answered in this case study solution:

1. How well is Butler Lumber doing? Why?
2. What has been the company’s financial strategy? Why does Mr. Butler have to
borrow so much money to support this profitable business? Has he been managing his
company’s cash flow wisely?
3. Do you agree with his estimate of the company’s loan requirements? How much
will he need to borrow to finance his expected expansion in sales in 1991 (assume
sales volume of $3.6 million)? How much will he need over the next several years?
4. Would you urge Mr. Butler to proceed with, or to reconsider, his anticipated
expansion plans?
Butler Lumber Company Case Analysis
How well is Butler Lumber doing? Why?

As, seen from the exhibits given in the case, Butler Lumber’s performance has been
performing consistently in the last few years. Its gross margin ratio is slightly below
30%, and its operating costs are maintained well at 25%. Considering that there is fierce
price competition, the ability of a new venture to make profits since its very inception is
an indicator of well managed business. However, after examining the ratios deduced
from the exhibits, there appears to be some problem. The cash to sales ratio is
decreasing with the increase in sales, and only 1.5% of sales are maintained on the
balance sheet, as cash. The account receivable to sales ratio is increasing year by year
which can be explained either by increasing sales or by inefficient management of cash
flow. The accounts payable to sales ratio has also increased. It can also be explained
by either of the two situations. Either Butler has very good ties with its suppliers or he
does not have the cash to pay back to the suppliers. From the case,it is known that
Butler is relying heavily on the trade credits to keep his bank borrowing under the ceiling
of $250k. Further analysis would tell by how much the two situations have impacted on
the accounts payable to sales ratio. The days of inventory ratio have also increased
because Butler needs to buy in bulk to avail the quantity discounts.
On a more rigorous analysis of the numbers, it was found that although the increase in
account receivables was due to the increased sales yet the credit management of the
Butler Lumber has led to the increase in the account receivable ratio as can be seen in
the accompanying spreadsheet. The deeper look into the account payable turnover also
shows that inability of the company to manage cash properly has led to the increased
ratio. The increase in this ratio may not be a good sign for Butler, because he is relying
heavily on the trade credits to make his business run. Any loss in the creditworthiness of
Butler can cause a great harm to the business.
What has been the company’s financial strategy? Why does Mr.
Butler have to borrow so much money to support this profitable
business? Has he been managing his company’s cash flow wisely?
The company’s financial strategy is based on getting trade discounts. As, it has been
mentioned in the case, Butler has not availed any considerable cash discounts on his
purchases. This strategy can be the cause of the cash problems that Butler is facing
right now. The companies, which are in their start-up phase usually face difficulties in
meeting their cash requirements, but for a profitable business like this one, keeping the
enterprise liquid is what matters. Butler purchases in large quantities, which warrant a
relatively large discount but this keeps the cash balance to the minimum.
Butler needs external finance because his business is undergoing significant growth,
but the business is not capable of generating enough working capital. If, Butler had
managed the account receivables and inventory more efficiently, there would have a
much better financial position of the business. If, the purchased were not made in large
quantities, the ending inventory would not have piled up, and the funds blocked in the
inventory could have been utilized somewhere else where they would generate income.
This argument is further solidified with the decrease in the inventory turnover ratio. The
inventory is not being converted into sales.Butler is losing a considerable amount of
money because of inefficient management of cash.
Do you agree with his estimate of the company’s loan requirements?

How much will he need to borrow to finance his expected expansion in
sales in 1991 (assume sales volume of $3.6 million)? How much will he
need over the next several years?
No, Butler has over-estimated the funds required for the year 1991. From the pro forma
balance sheet in the accompanying spreadsheet, it can be seen that the funds required
for 1991 are $324k. As, already mentioned in the case, the projection of financial
position for years ahead will not yield any reliable results; the analysis is done for the
one year ahead. All the variables have been calculated using the instructions given for
the year 1991. From the calculations, it is found that the line of credit that Northrop Bank
is extending towards Butler will run out in a year and the requirement in 1992 will
exceed the credit ceiling of $465k provider by the bank. The funds needed in the year
1992 are $473k, slightly above the bank ceiling only after one year, and these are
expected to increase given the current cash management of the company. If, the
accounts receivables are not decreased, inventory is not efficiently managed, or the
account payables are carefully dealt with, then the need for external finance is not going
to go away.

Butler Lumber Company: Following Questions Are Answered in This Case Study Solution

Uploaded by

Copyright:

Available Formats

Butler Lumber Company: Following Questions Are Answered in This Case Study Solution

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Butler Lumber Company: Following Questions Are Answered in This Case Study Solution

Uploaded by

Copyright:

Available Formats

Butler Lumber Company

1184 Words (3 Pages)

This case solution includes an Excel file.

This case solution includes a Word file.

Following questions are answered in this case study solution:

How well is Butler Lumber doing? Why?

Do you agree with his estimate of the company’s loan requirements?

You might also like