• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Statement of financial problem. Should Northrop National Bank extend a line of credit to Butler Lumber up to a maximum amount of $465,000?

Extracts from this document...

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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Accounting & Financial Management section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. Sources Of Finance

    trader business as this structure usually dose not need many employees and tends to have a small product line that it offers, usually something the owner is interested in or has for a hobby. This financial source will help the business in the short term for example setting up the

  2. finance for soletrader and partnership

    Merit The advantage and disadvantages of each kind of finance Mortgage Advantages - there are lots of different advantages for mortgage such as you don't need to verify your income and can pay a lump some depending on the mortgage type.

  1. Free essay

    `Accounting as a discipline has no theory`. Critically evaluate this statement and provide examples ...

    The true and fair view is produced to make information true and fair but has many problems in interpreting it. Epistemology regards the theory of knowledge. "Knowledge is used to construct reality" so it is important to see where knowledge is derived from.

  2. A2 Business CourseWork

    especially being a market leader and having the biggest market share will mean that its decisions will have a bigger effect on the public. They have to be competitive but reasonable, and ensure that the circumstances meant that it loses its market share.

  1. Financial Ratio Analysis.

    Cash flow accounting should be both retrospective, and also include a forecast for the future. This is of great information value to all users of accounting information.

  2. Business Income and Expenditure

    It is better and easier for the businesses if they rent out a property rather then buying building instead of mortgaging it out as this is because if they business do not do well and become bust they may not able to pay back the mortgage which then would lead

  1. Advantages and Disadvantages of Credit Cards

    This means that they have nearly a month to pay their bill. Similarly, if your child needs to go to the hospital immediately, you don?t have any cash with you; you can pay the medical bill with your credit card and then be charged after a month.

  2. Accounting Case Study Questions. BUSHRA'S BUSES - Cash flow forecast

    could be overcome by offering discounted school services for the rest of year and branch out into Christmass shopping excursions and theatre trips for example. This could be one way to stop the cash flow stalling and make the company less orientated to the summer months.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work