Because they have faced cash shortage trouble. Their profitability has grown for 1993 ~ 1995 period, as we can see from their I/S (e.g. Sales and Net Income, etc.). However, as its business size grows, their A/R increased, which means that it is getting difficult to collect cash. On the other hand, A/P decreased for the same period, which means that the company paid cash for A/P, resulting in critical cash shortage. Furthermore, the A/P payment period is shorter than A/R collection periods, the company’s cash problem happens to be accelerated.
(Exhibit 1) | 1993 | 1994 | 1995 | 1996 | CAGR | AR / Sales | 0.105 | 0.118 | 0.134 | 0.137 | 5.1% | Invent / Sales | 0.115 | 0.124 | 0.130 | 0.143 | 4.8% | Invent turnover (COGS/Inv) | 6.534 | 6.097 | 5.833 | 5.265 | -4.8% | (AR+Inv)/Sales | 0.220 | 0.242 | 0.264 | 0.280 | 4.9% | AP / Sales | 0.073 | 0.098 | 0.083 | 0.086 | -4.3% | NP / Sales | 0.000 | 0.017 | 0.086 | 0.094 | 75.9% | Collection Period Days | 38 | 43 | 49 | 50 | 5.1% | Days to Pay | 35 | 45 | 38 | 41 | -3.7% | Time gap b/w collection and pmt. | 3 | -2 | 11 | 10 | |
Q1-2. How has Mr. Clarkson met the financing needs of the company during the period 1993 ~1995?
The company has borrowed from bank as a term of note payable. | 1993 | 1994 | 1995 | Q1 1996 | Notes payable, bank | $ -- | $60 | $390 | $399 |
Q1-3. Has the financial strength of Clarkson Lumber improved or deteriorated? Deteriorated. The liquidity in the company has kept decreased over the 3 years. Current ratio has gone down from 2.4945 to 1.1480, Quick Ratio down from 1.2691 to 0.6085, Cash Ratio down to 0.1564 to 0.0515, etc. (please refer to below exhibit 2)
(Exhibit 2) | 1993 | 1994 | 1995 | Q1 1996 | Current Ratio (CA/CL) | 2.4945 | 1.5841 | 1.1480 | 1.1584 | CA/Sales | 0.2349 | 0.2574 | 0.2764 | 1.1704 | CL/Sales | 0.0941 |