Inventory turnover is also decreasing and less than the average, but as stated previously, it is because the company has more inventory on hand to give their customers plenty of selection. For instance, in 1995, it was 5.83 times vs. the industry average of 8.1 times, but this gives them an advantage and gives customers a reason to come to them instead of other companies. Since, lumber is a commodity the company has to find a new way to compete. One way is to have a larger selection for the customers. As for accounts receivable turnover, it is also decreasing and less than the average but also signifies another area in which the company is trying to compete in the industry. For instance, in 1995, it was 7.46 and the industry average was 10.7 times. Therefore, Clarkson doesn’t get paid right away but it does make the customers more comfortable since they don’t have to worry about paying the lumber back to Clarkson. Also, since most customers are probably contractors, it would make them happier to be able to use the wood and get paid first, so they can pay Clarkson.
The average collection period of accounts receivable is increasing. Customers, as stated before, are given the opportunity to pay later. Instead of paying every 34.1 days like the average, Clarkson customers have been able to pay back in about 49 days. As for the average payment period, Clarkson has been testing its boundaries and bargaining power to see how many days he could take to pay back his purchases. For instance, he took 35 days in 1993, 45 days in 1994, and 38 days in 1995. It seems that he tried to take longer but then the suppliers may have talked to him because he improved to 38 days, however, it is still an extra 8 days from the typical 30 day invoice. The problem with this is that he isn’t taking advantage of the 2% discount which is evident that many companies do since the industry average is only 16.3 days. However, at this point it doesn’t seem very possible since the loan limit and lack of cash make it hard to take advantage of this situation.
Based on the pro forma sheets there is an additional $251,000 needed to attain the goal of $5.5 million in sales. Also, since part of the agreement is to break off from Suburban National Bank, the line of credit has to cover the 399,000 covered by the loan. Therefore, the amount needed is $650,000 as seen in Exhibit 6. The credit line would also help to pay for inventory instead of having to go on trade and the notes payable for Mr. Holtz which is supposed to be paid by the end of 1996 and is paid in installments of $50,000 at a time.
The company doesn’t supply a very high risk to the bank. The company has its problems but they all seem to stem from the fact that the company has a loan limit and lack of cash since customers take longer to pay. The company doesn’t have a very big risk because this problem would be solved with the equity line. It would fill in the time gap from paying for inventory and from being paid by the customers. The company has a good strategy to compete by having more inventory on hand and allowing customers more time to pay for the lumber. Clarkson has good references which show that in the past he has been a good businessman to deal with. With an economic downturn but the company is protected in new housing construction because of the relatively high proportion of its repair business. Sales, net income, and return on equity are increasing and show the company has a lot of potential. Another plus is that the assistant knows how to do everything that Clarkson does, so if anything were to happen to him, there is a replacement. Also, if Clarkson weren’t able to pay back the loan and the bank takes the company it should be able to make money selling it since it has a lot of potential.
Exhibit 1:C. = Current
Exhibit 2:
Exhibit 3:
Exhibit 4:
Net Sales: estimated figure (given)
Cost of Goods:
Beginning Inventory: Ending Inventory of previous year.
Purchases: Purchases/Net Sales (previous years)
1993: 2209/2921= 0.756 = 75.6%
1994: 2729/3477= 0.785 = 78.5%
1995: 3579/4519= 0.792 = 79.2%
1996 est.: 79% (rounded average for past two years)
79% of 5500 (sales) = 4345
Ending Inventory: Ending Inventory/ Net Sales (previous years)
1993: 337/2921= 0.115 = 11.5%
1994: 432/3477= 0.124 = 12.4%
1995: 587/4519= 0.130 = 13.0%
1996 est.: 13% (because of increasing trend)
13% of 5500 (sales) = 715
Total Cost of Goods: (Beginning Inventory + Purchases) – Ending Inventory
Gross Profit: Net Sales – Total Cost of Goods Sold
Operating Expenses: Operating Expenses/ Gross Profit (previous years)
1993: 622/719= 0.865 = 86.5%
1994: 717/843= 0.851 = 85.8%
1995: 940/1095= 0.858 = 85.8%
1996 est.: 86% (because of increasing trend)
86% of 1283 (projected gross profit) = 1103
Earnings before interest & income taxes: Gross Profit- Operating Expenses
Interest Expense: Interest Expense/ Total Liabilities (from balance sheet)
1993: 23/415= 0.055 = 5.5%
1994: 42/785= 0.054 = 5.4%
1995: 56/1188= 0.047 = 4.7%
1996 est.: 4.5% (because of decreasing trend)
4.5% of 1173 (Total liabilities from 1st quarter) = 53
Net Income before income taxes: Earnings before interest & taxes – interest expense
Provision for income taxes: If net income before taxes is over $100,000 income taxes is 34%. Net income before taxes is 127 and 34% = 43.
Net Income (bottom line): Net Income before taxes- provision for taxes.
Exhibit 5:
Cash: Taken from 1st quarter of 1996.
Accounts Receivable: (Accounts Receivable/ Sales)
1993: 306/2921 = 10.5%
1994: 411/3477 = 11.8% (increase of 12.4%)
1995: 606/4519 = 13.4% (increase of 13.6%)
1996: increase of about 14.5% on 13.4% = 15%
15% of sales = 825
Inventory: (sales/ inventory turnover)
5500/6 = 917
Current Assets: cash + accounts receivable + inventory
Property: Taken from first quarter of 1996.
Total Assets: current assets + property
Notes Payable: Same as last year since there is the 400,000 limit = 399
Notes Payable to Holtz, current portion: same as last year because it’s the same portion every year = 100
Notes Payable, trade: 127 because same as last year, because already seriously extended and shouldn’t be extended any more
Accounts Payable: Avg. Accounts Payable for 1995 was 38 days
365/38 = 9.6 times a year.
5500/9.6 = 573
Accrued Expenses: previous year + increase in tax expense
75 + (43-22) = 96
Term Loan, current portion: same as previous year, always the same
Current Liabilities: Total of liabilities so far
Term Loan: Previous year – current portion
100 - 20 = 80
Note Payable, Mr. Holtz: Same as previous year
Total Liabilities: current liabilities + term loan
Net Worth: Previous year’s net worth + net income. Previous Year: 372 (1994) + 77(1995) = 449
449 + 84= 533
Additional Financing: Total Assets – Total Liabilities – Net Worth
2179 - 533 – 1395 = 251
Total Liabilities and Net Worth: Total Liabilities + Net Worth + Additional Financing = Total Assets
Exhibit 6:
Total Amount Needed = Notes Payable + Additional Financing = 399 + 251= 650 (Holtz payable of 100 would make it 750)
