Butler Lumer Analysis
Butler Lumber Companyby nhsdf | studymode.comGroup:Lucas Ghiglione – 260460555Noah Lackstein – 260524490Kayley Lankinen – 260534412Elliot Leimer – 260447577Noah Seltzer – 260532481Subject:Butler Lumber CompanyProblem:The Butler Lumber Company does not have adequate cash on hand to manage their operations, and has become reliant on trade credit and sometimes late payment of accounts payable to manage their cashflow. With sales projected to increase by 25% to 35%, the company must decide whether to accept a larger line of credit from Northrop National Bank. Options:Do nothing, and maintain their current loan with Suburban National Bank Accept the larger loan from Northrop National BankRecommendation:Given the available data, the Butler Lumber Company should accept the loan from Northrop National Bank.The Butler Lumber Company is in danger of not meeting their short-term liabilities (their credit purchases), due to their illiquidity. This will tarnish their otherwise flawless relationship with suppliers and hinder the company’s expected future growth. Butler Lumber Company is presented with two options to solve their low cash flow issues, both in the forms of external financing. This case analysis will further explore both options, their pros and cons, and devise an informed, reasonable course of action for Butler Lumber Company to solve this dilemma.
Current SituationIn order to examine Butler Lumber Company’s current situation, we used ratio trend analysis from 1988 – 1990.Liquidity Ratios:At first glance, the current ratio appears to be in good form with a small decreasing trend from 1988 (1.8) – 1990 (1.45). Though the ratio is decreasing, Current assets are still greater than current liabilities, which gives us the impression of liquidity. However, when one analyzes the quick ratio it is apparent that inventory accounts for a large portion of current assets, and becomes a larger portion over time; the quick ratio has a decreasing trend from 1988 (0.88) – 1990 (0.67). This is worrisome because they have very little cash on hand, and increasing accounts receivables, which points out to a serious liquidity issue.