Butler Lumber Case

Recommendation:

Butler Lumber Company should renegotiate the terms of the potential loan from Northrop National Bank. The company’s current loan needs are $286,000 (please see exhibit 2). This is much less than the $465,000 initially proposed, which could overleverage the company and put it at a higher risk for default given the short, 90-day line of credit, plus interest. In addition, because your equity level is relatively low, securing a loan of that size with your physical, real property is too risky and not recommended. We suggest negotiating an unsecured, revolving loan for $286,000. In doing so, you will be better able to finance your permanent working capital needs, as well as pay off your debt to Suburban National Bank. Additional funds for the future can be renegotiated as necessary.

Discussion of Issues and Assumptions:

Issue 1:

While Butler Lumber Company continues to be profitable, the firm needs additional funding to meet its significant working capital requirements and to prepare for the substantial increase in sales for 1991 of approximately $3.6 million. Because the business is seasonal, with 55% of sales occurring between April-September, the current loan from Suburban National Bank does not meet the firm’s upcoming financial requirements and additional funding will not be allotted as Butler has reached Suburban’s maximum. Notably, cash reserves have gone down from $58,000 in 1988, to $41,000 in 1990, resulting in capital shortages. The cash ratio for years 1988-1990 have been 22%, 13% and 8%, respectively (exhibit 1). Also, the inventory conversion has increased to 78 days in 1990 from 71 days in 1988 (exhibit 1). This means that it is taking the company almost 4 months to sell its inventory. This is likely the result of very little marketing. Additional clients would help lower the inventory costs. In addition, the receivables turnover has increased every year, from 37 days (1988) to 41 days (1989) and to 43 days (1990)...