Butler Lumber Company Case Study Essay

drumhead of Facts. pantryman beat Company is a Pacific Northwest based timber distri exactlyor that sells plywood, moldings, and sash and door products. The restore owner of pantryman ram is brandmark pantryman, accompanied by 1 administrative assistant and ten employees who focus on repairs and labor intensive work. Because of pantryman timbers competitive set scheme, it has seen fast incurth in the old few years. overdue to the rapid harvest-tide and a deficit of interchange in 1990, pantryman timber Company is seeking to pull in ones horns aside an supernumerary lendword in order for the business to sustain itself and grow in the coming years. pantryman timbre has the selection to expect a loanword of $250,000 from suburban bailiwick verify, or accept an unfastened revolving 90- daylight keep of $465,000 at 10.5% refer from Northrop national buzzword. If Mr. pantryman decides to accept the none from Northrop subject field aver, it go out sever the vivacious ties with Suburban subject field Bank and a new family must be well-kept.Problem. If Mr. pantryman accepts the loan from Suburban National Bank, he must agree to a secured loan that is backed by his veridical property that go forth act as collateral for the agree 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 act a much larger unsecured loan. The amount of the loan spreeed by Suburban National Bank has made Mr. pantryman existingize the bon tons fruit potential subjoin in sales, moreover overly realize the increase in debt. Since he is limited on his loan and has little notes on hand, he has turned to trade attribute for the previous(prenominal) few years. As consultants, we exit inquire the following four key issues * Should Butler forest sever ties with Suburban National bank in order to baffle a larger loan from Northrop National Bank? * Why does Butler lumber hold back a funds dearth puzzle to begin with, and atomic number 18 they shortly employ their existing funds expeditiously?* How much additional sustenance does Butler pound exigency, and depart they move on to need even out more in the rising? * What sort of implications does the soakeds ingathering suggest? * Are there diversifynating(a) solutions to Butler woodlands money shortage problems? Analysis. The need for cash is low-cal however, there could be multiple opportunities to gear up the capital that is needed. It is imperative that Butler lumber takes into consideration the cost associated with accepting international finance, and in turn be suit sufficient to assess whether or not it is the exceed solution. If relying on external support is not plausible, Mr. Butler pass on perplex to count for preference methods to grow his business whether its finding a different financing solution or a substance to fall cash by fixture management activities.As we assess Butler Lumbers operations from 1988 to 1990, it is opened that his reliance on trade credit and a specific focus on having a very competitive pricing schema has allowed the partnership to gene prescribe receipts up to this point. Although the bon ton was able to generate revenue at an increasing rate during the gon years, Butler Lumber was unable to accumulate any cash in order to fund operations touching forward. We will start by assessing one of the two immediately available options presented for Butler Lumber Butler Lumber lavatory remain with Suburban National Bank by accepting their loan offer of $250,000. The further likely service of this option lies solely 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 immediately secured (backed by Mr. Butlers real prope rty), signaling that the bank has doubts that Butler Lumber will pay back the loan amount.Though Butler may be capable of repaying the amount, it is inevitable that the go with will need more financing. Due to the banks recent focus on the riskiness of Butler Lumber, this may alter their ability to receive more living from Suburban National Bank. Mr. Butler could or else choose to take the unsecured revolving 90-day watch of $465,000 at 10.5% interest from Northrop National Bank. The apparent advantages are it is a more supple 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 change magnitude interest expense on the loan. other disadvantage of establishing a LOC with Northrop National Bank is the possibility of restrictions on the company stating that the simoleons working capital be upholded at a level agreed upon by both parties and any increase in fixed assets with approval by Northrop.Also there would be limitations on withdrawals of funds from the business by Mr. Butler. other 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 period due to the lack of cash and liquid assets. -Why does Butler Lumber have a cash shortage problem to begin with ,and are they topically using their existing funds efficiently? The Sources and Uses of monetary resource brings forth a snapshot of the companys cash flows and illustrates the reason hindquarters Butler Lumbers cash deficit. For the past two years, Butler Lumber has generated negative cash flow from operations, which is terrible for the firm. Given the typical business mannequin of a growing firm, Butler Lumber has seen increases in both the muniment and due accounts.This makes sense because the more c ustomers Mr. Butler has, the more inventory he needs to have on hand and given his sensibly lackadaisical approach on retribution hive upion, the amount of dues 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 plus Utilization Analysis table, the ratios for both receivable and inventory indicate that it is taking a longer period of time to collect money and a is holding on to inventory for much longer (nearly 15% and 10% longer, respectively).It is clear that Butler Lumber is not maximizing operational aptitude and will accrue 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? subsequently analyzing an d projecting Butler Lumbers 1991 Pro Forma Balance Sheet, we have distinguishable to separate the projections when considering the current payable constitution and also considering discounts. We have concluded that Butler Lumber will need additional funding of $409,000 under the current payables policy, and including fuck off discounts, they will need $658,000 (seen in establish 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 suspense becomes whether Mr. Butler should take advantage of the 2% purchase discount or continue to rely on the suppliers payment flexibility. The pro-forma epitome we generated is based on recent part of sales from the years 1988-1990. -What sort of implications does the firms exploitation suggest ? requirement SOMETHING ABOUT HOW THE SALES GROWTH OVERSHOOTS THE sustainable GROWTH-Are there Alternative solutions to Butler Lumbers cash shortage problems? If Mr. Butler does not or cannot obtain the loan through Northrop National bank, an alternative option is Recourse calculate. Recourse Factoring is the selling off of Accounts receivables where the selling company is settle down responsible in the solvent of receivable default. A factor company purchases receivables from other companies and provides the necessary capital for a tenuous 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 immense cash shortage problem.Butlers Receivable turnover has decreased from 9.92 in 1988 to 8.5 in 1991 indicating it is taking longer to date back much needed cash. If Butler was able to factor away their receivables they would have more working capital, a fle xible funding program that will increase only as their sales increase and also would help Butler take advantage of purchase discounts. If Butler found a Factoring company to take on 75% of their receivables , $317,000 cash would be freed up and eliminate the need for Additional funding. eventide 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 embroil any negative covenants such as restrictions on the sale of assets, engaging in other businesses, and voluntary prepayment of other indebtedness. This financing is needed because the expected sales growth exceeds the firms sustainable growth rate and leads to a nega tive cash flow because of the trends Mr. Butler has displayed regarding his payables and receivables.