Statement of financial problem. Should Northrop National Bank extend a line of credit to Butler Lumber up to a maximum amount of $465,000?
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Introduction
Butler Lumber Case Study BA 6420 Instructor: Dr. Robert Malko Student: Brent Nordgren I. Statement of financial problem. Should Northrop National Bank extend a line of credit to Butler Lumber up to a maximum amount of $465,000? II. A framework of analysis. I am using the Indirect Statement of Cash Flows method to analyze the Butler Lumber case. When a company seems profitable but is in serious need of a cash infusion, often the problem stems from poor cash flow. Calculating the cash flow coming in and going out will explain "Where did our money come from?" and "Where did our money go?" Likely, it will discover how a company's cash was generated during the period and how that cash was used-or misused. A statement of cash flows provides details as to how the cash account changed during a period. It also helps to understand how events and decisions impacted cash flow during each period. A statement of cash flows provides important information from a cash-basis perspective and complements the income statement and balance sheet, and provides a more complete picture of a company's operations and financial position. ...read more.
Middle
IV. Mitigating Circumstances and Assumptions: By examining the statement of cash flows, we discover a major concern in three areas: (1) Inventory, (2) accounts receivable, and (3) accounts payable. All three are moving in a negative, undesirable direction; but inventory is escalating at a greater overall rate and seems to be out of control by the end of the first quarter of 1991. The greatest contributing factor causing Butler Lumber's debt and cash-shortage problem is that they are purchasing much more inventory than they are using. Having too much cash invested in their inventory is their main problem but they have some offshoot problems that tend to be growing out of their inventory problem: 1. One way that companies fund a cash-shortage problem is to keep their accounts payable high. This is an easy way to "borrow" short-term money, but when a company is slow to pay its bills and owes a significant amount of money, they potentially damage their credit and their business relationships with their suppliers. ...read more.
Conclusion
They need to analyze their inventory turnover ratios and compare them with and keep them in line with industry averages to ensure the numbers are not unreasonable or unachievable. (b) An alternative approach to reducing inventory might include hiring sales personnel who would help convert inventory into profitable sales. 3. Butler should be more aggressive in collecting their accounts receivable. This would provide more cash and, in turn, help Butler to take advantage of available discounts from their vendors. This too would further increase their cash flow and reduce the need to borrow unreasonable amounts of money. 4. Mark Butler should retain less in personal salaries and other perquisites. This would demonstrate to Northrop National that he is personally making serious attempts to increase cash flow, get out of debt, and gain control of other emerging problems. Besides, personal taxes on his income is at a fairly high rate when it rises above $50,000. This is another area where he could increase cash flow while showing that he is truly doing "whatever it takes" to fix the problems facing Butler Lumber. 1 ...read more.
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