Butler Lumber Company Analysis Essay

Based on the information and gibe monetary asseve symmetryns provided, we concluded that Bulter impound federation has to collect money from remote resources to compensate its funding prison-breaking of 383,000 USD. From the perspective of banker, we wont clear Mr. pantryman s loan request From the perspective of firms pecuniary advisor, it is better to finance from new shareholders than to borrow from bank. II. Analysisi. Funding gapThere are ternary main reasons why pantryman Lumber Comp each has to finance itself through outside resources. Firstly, It was mentioned in the document that Butler is offered a trade discount by suppliers, which is 2/10 with 30 days span of due. However, Mr. Bulter had never been capable to use such(prenominal) a discount because of the shortage of funds. Purchase of Starks shares and expansion of menses business both contribute to the lack of cash. The inability to take value of trade discount directly lead to the add in COGS and further lower down the companys profitability despite the position that gross revenue is increasing (statistics shown in table 10). therefore, it would be a perspicacious choice for Mr. Butler to fully utilize the discount to ease his compress on liquidity and further lower costs to annex profitability. Secondly, the circumstance of in operation(p) efficiency in Butler Lumber Company is worrisome.As showed in table 6, past three years have seen a rise up in days of accounts receivable, from 36.7 to 40.2 days, indicating that for every one receivable dollar , the company needs 40.2 days to collect from customers. Consequentially, the same increase applies to days of accounts collectable which is rising sharply from 37 to 47.9 days. It means that for every payable dollar, the company needs 47.9 days to pay back. This combine contributes to the inefficiency of operating turnover which is of vital importance for a trade company. Therefore, in rate to avoid illiquidity resulted from su ddenly change of macroeconomic and support companys continuous growth, Mr. Butler has to increase cash to buffer itself.Thirdly, We also notice that notes payable should reach a higher level (382,000 USD) if the assumed sales volume (3,600,000 USD)of 1991 is to be achieved. We use statistics of 1990 as basis and calculate the symmetry of some accounts to net sales. then we apply these proportion to forecast the income statement and balance sheet for 1991(the calculation process is shown in circuit card 3 ).since the amount of notes payable in 1990 should be paid back by the end of 1991, so the ending number of note payable in 1991 should be the amount of newly borrowed money from bank .In other words, to cook the sales goal, another 382,000 USD should be financed. Therefore, we disagreed with previously estimated amount of 465,000 USD by Butler and Dodge and we recommend a lower amount of 382,000 USD is enough to convey the daily operations of the company for the whole year. ii . Prospective from bankerBased on the grades of credit, capacity and positive, we perceive the risks for lending money overwhelm the benefits and decide to prevent Butlers application for the loan. We evaluate Butler Lumber Companys application for loan through grading the credit, capacity and collateral with three levels poor, normal, and great.(1) CreditFor small businesses, the character of the entrepreneur is very essential. Our public investigation found out Butler is an energetic man wholly dedicated to his business. Barker Company, one of Butlers large suppliers, reckoned he possesses sound judgment and a willingness to devote into his work and keeps close centre on his own credit. Moreover, there is no evidence evincing Butler involving any delinquent event. Generally, we believe Butler is a reliable business man. However, the financial data of Butler Lumber Company is not that palatable. The company is involved by the debt (table 9). As of 1990, the current liability is 535,000, equivalent to 19.86% of net sale. In fact, leverage ratio is worsening during last three years. The ratio of debt and right surges from 1.2 in 1988 to 1.68 in 1990. Whats more, the operation efficiency (table 6)still has room to elevate. honest account receivable days are too long. Account payable keeps ascending. To sum up, we give Butler a grade of Normal.(2) powerWith regard to the capacity for repay the loan, we mainly consider thecompanys profitability coverage ratios and liquidity ratios In this construction, the companys process is somewhat disappointing (table 10). The net sale reached 2,694,000 dollar in 1990 with a strategy mixed price competition and control of operating expenses and costs. except net profit margin experienced a downward trim back during last three year. In addition, the liquidity is worsening (table 8). Both the ratio of EBIT/Interest expense and the current ratio slumped from 3.85 to 2.61 and from 1.8 to 1.45 respectively during last three years. Hence, our conclusion is Butlers company is quite risky merited a grade of scurvy.(3) CollateralUntil the end of 1990, the net office of the company is worth approximately 157,000 dollars. Butler held jointly with his wife impartiality in their house, which had cost 72,000 dollar in 1979, yet was mortgaged for 38000 dollar. These complete assets together amounts 190,000 dollars. If we lend 465,000 dollar to Butler and collect all his asset as collateral, the ratio of loan to value(LTV) is 40.86%, which is unacceptable. Thus, when it comes to collateral, we have to render a Poor to Butler.iii. Prospective from financial advisorAs Mr. Butlers financial advisors, instead of encouraging Mr. Butler to go ahead with debt financing, we recommend that it is more favorable to financing through new shareholders for the following reasons. Firstly, as the abstract showed above, we understand it is not that easy for the company to borrow money from banks. up to now we succe ssfully reach the agreement with bankers, we may subject to very trying debenture, which may form obstacles for companys further development. Secondly, indictors of operating return, such as ROE and ROIC, both show a steady increase during the past three years.ROE increased from 11.48% to 12.64%, a 10% gain. ROIC jumped from 12.90% to 19.01%, an increase of 47.4%. These two ratios indicate that the company has earned on its past investments and it is able to find investment opportunities that are very profitable. These ratios may be irresistible to introduce new shareholders. Hence, we suggested that it is better for the company to finance by truth than by debt. Moreover, the joint of new shareholders in the management team flush toilet help to improve the management andoperation of the company, especially in the aspect of inventory and credit policy.III. Appendix fudge 1 Income Statement put back 2 Common Size Income StatementTable 3 isotropy rag weekTable 4 Common Size B alance SheetTable 5 Free Cash Flow to FirmTable 6 Operating EfficiencyTable 7 Operating ReturnsTable 8 Liquidity ratioTable 9 Leverage RatioTable 10 Profitability Ratio