Case Study Clarkson Lumber Company
Case: Clarkson Lumber Company
Issues
The issues that Mr. Clarkson should consider when analyzing the future of his business are:
• Can the business support growing at such a high rate?
• Is it a wise decision to continuing borrowing on an even higher line of credit?
• Is the business making wise choices in regards to whom it sells to?
Decision
The business cannot support the current rate of growth much longer.
Mr. Clarkson has no choice but to infuse the business with outside cash right away, however he needs to seriously consider other forms of financing after that. He must reduce liabilities and debt before accruing more and being consumed with payments and interest payments. He should explore the possibilities of equity financing, in order to bring cash into the business. Such possibilities could include recommending to his brother in law to keep his money in the business and receive dividends. Another equity financing option would be to re-mortgage his home and invest his personal …show more content…
cash in the business. The best thing that could happen to Clarkson lumber would be to slow down growth and seek equity financing. Clarkson Lumber Company needs to have stricter policies on the customers they allow to purchase from them on credit.
Analysis
The bank is projecting 5.5 million dollars, or more, in sales for Clarkson lumber in 1996.
As seen in Exhibit 2.2 in the appendix, the company would blow through their new $750,000 line of credit too quickly. If the Clarkson Lumber sells $5.5 million and their percentage of sales were to stay the same for the balance sheet items, they would have a more than $460,000 increase in uses of cash, not including the $399,000 that they have outstanding on their previous line of credit. If you subtract the almost $200,00 that they would generate in new sources of cash you can see that the will already use over $666,000 of their $750,000. Consequently, if they grew at the same rate that they grew from 1994 to 1995, 30%, their draw on their line of credit would be up to almost $725,000. As stated, these numbers are using the percentage of sales from 1995, if they continue to grow the uses of cash will be even higher. Accounts Receivable has increase from 10-13% from 1993 to
1995.
From this analysis of their numbers, you can see that the cash flow from operations is not able to keep up with the growth of Clarkson Lumber Company. One troubling aspect that can be deduced from their financial statements is their days in Accounts Receivable ratio. Even though their credit terms state a net of 30 days, their Days Sales in Account Receivable ratio went from 38 days in 1994 to 41 days in 1995, aside from the increase in percentage of sales presented in the last paragraph. One way they would be able to control that number better, would be to have stricter credit stipulations for their customers. This rule change might also slow down their sales, which would help them catch up with their debt and pay off some liabilities. Another way they would be able to slow growth would be to increase their profit margin, and get more revenue for their cost of goods sold.
An infusion of cash into the business and slowing growth would allow Clarkson to pay down his high trade credit balance, as well as the outstanding note payable to Mr. Holtz
When comparing Clarkson Lumber Company’s operating statistics to those of business in the same industry, Clarkson stakes up fairly well (Exhibit 3.2). However, we is far from comparing to the high profit outlets in terms of cash, current ratio and current liabilities; all things that are having a major strain on his cash flow, and causing him to borrow more and more money.
Issues
The issues that Mr. Clarkson should consider when analyzing the future of his business are:
• Can the business support growing at such a high rate?
• Is it a wise decision to continuing borrowing on an even higher line of credit?
• Is the business making wise choices in regards to whom it sells to?
Decision
The business cannot support the current rate of growth much longer.
Mr. Clarkson has no choice but to infuse the business with outside cash right away, however he needs to seriously consider other forms of financing after that. He must reduce liabilities and debt before accruing more and being consumed with payments and interest payments. He should explore the possibilities of equity financing, in order to bring cash into the business. Such possibilities could include recommending to his brother in law to keep his money in the business and receive dividends. Another equity financing option would be to re-mortgage his home and invest his personal …show more content…
cash in the business. The best thing that could happen to Clarkson lumber would be to slow down growth and seek equity financing. Clarkson Lumber Company needs to have stricter policies on the customers they allow to purchase from them on credit.
Analysis
The bank is projecting 5.5 million dollars, or more, in sales for Clarkson lumber in 1996.
As seen in Exhibit 2.2 in the appendix, the company would blow through their new $750,000 line of credit too quickly. If the Clarkson Lumber sells $5.5 million and their percentage of sales were to stay the same for the balance sheet items, they would have a more than $460,000 increase in uses of cash, not including the $399,000 that they have outstanding on their previous line of credit. If you subtract the almost $200,00 that they would generate in new sources of cash you can see that the will already use over $666,000 of their $750,000. Consequently, if they grew at the same rate that they grew from 1994 to 1995, 30%, their draw on their line of credit would be up to almost $725,000. As stated, these numbers are using the percentage of sales from 1995, if they continue to grow the uses of cash will be even higher. Accounts Receivable has increase from 10-13% from 1993 to
1995.
From this analysis of their numbers, you can see that the cash flow from operations is not able to keep up with the growth of Clarkson Lumber Company. One troubling aspect that can be deduced from their financial statements is their days in Accounts Receivable ratio. Even though their credit terms state a net of 30 days, their Days Sales in Account Receivable ratio went from 38 days in 1994 to 41 days in 1995, aside from the increase in percentage of sales presented in the last paragraph. One way they would be able to control that number better, would be to have stricter credit stipulations for their customers. This rule change might also slow down their sales, which would help them catch up with their debt and pay off some liabilities. Another way they would be able to slow growth would be to increase their profit margin, and get more revenue for their cost of goods sold.
An infusion of cash into the business and slowing growth would allow Clarkson to pay down his high trade credit balance, as well as the outstanding note payable to Mr. Holtz
When comparing Clarkson Lumber Company’s operating statistics to those of business in the same industry, Clarkson stakes up fairly well (Exhibit 3.2). However, we is far from comparing to the high profit outlets in terms of cash, current ratio and current liabilities; all things that are having a major strain on his cash flow, and causing him to borrow more and more money.