Clarkson Lumber Company Essay
Clarkson Lumber Case
I. Statement of Problem.
The basis of Clarkson Lumber Companies problems occurs from their rapid growth in the recent years. Sales have increased by 54.7% from 1993 to 1995; assets have increased by 78.12%, while net income has only increased by 28.33%. In order to support these growth patterns, Mr. Clarkson has been required to rely on loans in order to have sufficient funds. Also, Mr. Clarkson decided to buy out his old partners Holtz’ interest in the company. Clarkson got the maximum amount of financing possible with Suburban National Bank, 399,000, so they need to look for alternative financing in order to support this growth.
II. Statement of Facts and Assumptions.
We projected that Clarkson’s profitability …show more content…
will keep their growth rate steady in 1996 and beyond. In the past Clarkson has been able to maintain their financial needs through small term loans with Suburban National Bank, and with limited investments in property. In order to sustain their profit levels, Mr. Clarkson has reached out to Northrop Nation Bank to obtain a loan and was granted $750,000. Our assumption is that Mr. Clarkson will take the loan, but it will be exhausted quickly. As you can see in our attached exhibits we believe a majority of the loan will be absorbed in 1996, $656,000, with the remainder being used up in 1997. A majority of this is comprised from the 399,000 required to pay off Suburban National Bank, and the remaining 100,000 still owed Holtz. An aspect that is hurting the Clarkson Lumber Company is there lower than average gross margin numbers. Their increases in debt ratios and accounts receivable shows that the company needs more money to keep up with the current growth in sales and inventory. We used the assumption that Clarkson Lumber would continue its growth at 22% YoY, which is the growth from 1995 to 1996. With this loan, Clarkson would be able to take advantage of the 2% discount most of their clients allow them if they pay within 10 days. This in turn will allow the company to increase their margins as well as maintain competitive in the market. Being a lumber company it allows them to have stability in the market. They have extremely high sales volume increase, but with their lack of funds intake,
III. Analysis. This contains your analysis of the various courses of available actions.
As previously stated our analysis shows that we do not think the 750,000 will be suffice.
It allows Clarkson lumber company to do a lot more with their business, but it comes up just short of what is required. Obviously our analysis is under the guidelines that the growth of all aspects of the company will increase at the same 22% amount that has been demonstrated in their sales area. Our team suggests that the bank not loan the Clarkson Lumber Company the amount listed. Clarkson Lumber has some problems, but they all stem from the fact the loan limits are low and their customers take an increased amount of time to pay. Their risk stems from the fact that the loan value is just going to come up short of the amount they need. However if some changes were made to investments and a minor turn around in their receivable time, this could become a whole new discussion. Clarkson Lumber does have a lot of potential, as you can see from our exhibits, sales, net income, and return on equity have all increased in the recent years and continue to show that trend. The bank could go the route of lending the money on the terms that if Mr. Clarkson fails to pay back the amount borrowed, the company has been showing enough potential to perhaps acquire and sell for a
profit.
IV. Recommendation.
Our team recommends that Mr Clarkson work on some of his customers before he accepts a loan of this magnitude. As much as the 750,000 will help, he will be in a similar place in two years, trying to obtain a loan from a larger bank and figuring ways to reduce his debt. Some ways to eliminate the elimination of all 750,000 in two years could be slow down the sales growth, improve their collection period, in turn reducing their accounts payable, and perhaps reduce Mr Clarkson’s salary requirements. Clarkson Lumber Company has shown great potential and fixing a few keen errors will allow them to grow at the rate they need. A lot of companies have shown great success in rapid growth, but if you don’t have the cash flow to support it, you wont be successful. Also, we suggest Clarkson lumber start utilizing the 2% discount for paying their bills within 10 days. This significantly reduces their Accounts Payable, as well as reduced the amount of notes payable required. If you annualized the discount, the interest rate = 36% [.02*(360/20)], This is based upon pay terms of 2/10 net 30. The 36% is more than 3 times the cost of utilizing the line of credit from Northrup Banks 11%. Clarkson Lumber is definitely not a company with high risk and we can see the bank accepting the loan, but based on our assumptions and the information provided we feel that other opportunities might proved better leverage and increase their liquidity.
I. Statement of Problem.
The basis of Clarkson Lumber Companies problems occurs from their rapid growth in the recent years. Sales have increased by 54.7% from 1993 to 1995; assets have increased by 78.12%, while net income has only increased by 28.33%. In order to support these growth patterns, Mr. Clarkson has been required to rely on loans in order to have sufficient funds. Also, Mr. Clarkson decided to buy out his old partners Holtz’ interest in the company. Clarkson got the maximum amount of financing possible with Suburban National Bank, 399,000, so they need to look for alternative financing in order to support this growth.
II. Statement of Facts and Assumptions.
We projected that Clarkson’s profitability …show more content…
will keep their growth rate steady in 1996 and beyond. In the past Clarkson has been able to maintain their financial needs through small term loans with Suburban National Bank, and with limited investments in property. In order to sustain their profit levels, Mr. Clarkson has reached out to Northrop Nation Bank to obtain a loan and was granted $750,000. Our assumption is that Mr. Clarkson will take the loan, but it will be exhausted quickly. As you can see in our attached exhibits we believe a majority of the loan will be absorbed in 1996, $656,000, with the remainder being used up in 1997. A majority of this is comprised from the 399,000 required to pay off Suburban National Bank, and the remaining 100,000 still owed Holtz. An aspect that is hurting the Clarkson Lumber Company is there lower than average gross margin numbers. Their increases in debt ratios and accounts receivable shows that the company needs more money to keep up with the current growth in sales and inventory. We used the assumption that Clarkson Lumber would continue its growth at 22% YoY, which is the growth from 1995 to 1996. With this loan, Clarkson would be able to take advantage of the 2% discount most of their clients allow them if they pay within 10 days. This in turn will allow the company to increase their margins as well as maintain competitive in the market. Being a lumber company it allows them to have stability in the market. They have extremely high sales volume increase, but with their lack of funds intake,
III. Analysis. This contains your analysis of the various courses of available actions.
As previously stated our analysis shows that we do not think the 750,000 will be suffice.
It allows Clarkson lumber company to do a lot more with their business, but it comes up just short of what is required. Obviously our analysis is under the guidelines that the growth of all aspects of the company will increase at the same 22% amount that has been demonstrated in their sales area. Our team suggests that the bank not loan the Clarkson Lumber Company the amount listed. Clarkson Lumber has some problems, but they all stem from the fact the loan limits are low and their customers take an increased amount of time to pay. Their risk stems from the fact that the loan value is just going to come up short of the amount they need. However if some changes were made to investments and a minor turn around in their receivable time, this could become a whole new discussion. Clarkson Lumber does have a lot of potential, as you can see from our exhibits, sales, net income, and return on equity have all increased in the recent years and continue to show that trend. The bank could go the route of lending the money on the terms that if Mr. Clarkson fails to pay back the amount borrowed, the company has been showing enough potential to perhaps acquire and sell for a
profit.
IV. Recommendation.
Our team recommends that Mr Clarkson work on some of his customers before he accepts a loan of this magnitude. As much as the 750,000 will help, he will be in a similar place in two years, trying to obtain a loan from a larger bank and figuring ways to reduce his debt. Some ways to eliminate the elimination of all 750,000 in two years could be slow down the sales growth, improve their collection period, in turn reducing their accounts payable, and perhaps reduce Mr Clarkson’s salary requirements. Clarkson Lumber Company has shown great potential and fixing a few keen errors will allow them to grow at the rate they need. A lot of companies have shown great success in rapid growth, but if you don’t have the cash flow to support it, you wont be successful. Also, we suggest Clarkson lumber start utilizing the 2% discount for paying their bills within 10 days. This significantly reduces their Accounts Payable, as well as reduced the amount of notes payable required. If you annualized the discount, the interest rate = 36% [.02*(360/20)], This is based upon pay terms of 2/10 net 30. The 36% is more than 3 times the cost of utilizing the line of credit from Northrup Banks 11%. Clarkson Lumber is definitely not a company with high risk and we can see the bank accepting the loan, but based on our assumptions and the information provided we feel that other opportunities might proved better leverage and increase their liquidity.