Clarkson Lumber Case
Clarkson Lumber Company Financial Analysis
1. Background
Clarkson Lumber Company is owned and operated by the hardworking, 49-year-old Mr. Clarkson. It has low operating expenses, a small staff, and strong management. The overall impression is one of a conservative, efficient operation. Clarkson himself leads a frugal lifestyle with little personal debt.
The company has been in growth during recent years and anticipated a further increase in sales. Despite of consistent profits, the company has suffered shortage of cash and borrowed fund needed for its business growth. 2. Financial Analysis
See Appendix I, II & III. We find that increasing amount of borrowing despite of its consistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 55% from 1993-1995, the assets that support increase of sales increased by 78%. The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995. The net profit margin and operating expenses ratio have been stable over three years, however, interest expenses has increased almost 1.5 times. The firm’s current ratio deteriorated again and as a result, the firm has experienced the shortage of fund regardless of its consistent profitability. Second is the amount of note payable against Holtz. Mr. Clarkson bought out Mr. Holtz’ interest for $200,000 paid off in 1995 and 1996. Because of this cash outflow, the company needed cash inflow from bank. Thirdly, the company’s collection period (48.95 in 1995 and 38.24 in 1993) and Avg Days in inventory (62.57 in 1995 and 55.86 in 1993) are deteriorated as well.
According to the cash flow statement in Appendix II, we know that the company has some main financing channel to meet the needs of fund. One is using the fund of suppliers, which increased the amount of A/P from $213,000 to $376,000 and the
1. Background
Clarkson Lumber Company is owned and operated by the hardworking, 49-year-old Mr. Clarkson. It has low operating expenses, a small staff, and strong management. The overall impression is one of a conservative, efficient operation. Clarkson himself leads a frugal lifestyle with little personal debt.
The company has been in growth during recent years and anticipated a further increase in sales. Despite of consistent profits, the company has suffered shortage of cash and borrowed fund needed for its business growth. 2. Financial Analysis
See Appendix I, II & III. We find that increasing amount of borrowing despite of its consistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 55% from 1993-1995, the assets that support increase of sales increased by 78%. The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995. The net profit margin and operating expenses ratio have been stable over three years, however, interest expenses has increased almost 1.5 times. The firm’s current ratio deteriorated again and as a result, the firm has experienced the shortage of fund regardless of its consistent profitability. Second is the amount of note payable against Holtz. Mr. Clarkson bought out Mr. Holtz’ interest for $200,000 paid off in 1995 and 1996. Because of this cash outflow, the company needed cash inflow from bank. Thirdly, the company’s collection period (48.95 in 1995 and 38.24 in 1993) and Avg Days in inventory (62.57 in 1995 and 55.86 in 1993) are deteriorated as well.
According to the cash flow statement in Appendix II, we know that the company has some main financing channel to meet the needs of fund. One is using the fund of suppliers, which increased the amount of A/P from $213,000 to $376,000 and the