Dell Case Study

1. Judging by the increasing sales revenue, Butler Lumber is doing well. However, the company has serious liquidity problem that stems from the increasing WCR of the business. This WCR can be seen by the decreasing cash flows from 1988-1991 in the cash flow statement attached.

His ROE has been increasing, but this has been because of an increasing reliance on debt leverage seen in the asset/equity ratio.

2. Mr. Butler has been financing his business mostly with short term debt. He has to borrow to finance his WCR. The nature of the business requires up front purchasing of inventory for a cyclical business season. This inventory must be finance and then Mr. Butler must wait for his A/R to pay before he can see his cash returned.

Mr. Butler is not managing his cash flows wisely. He has to buy his inventory ahead of time and only makes sales during the summer months. He should finance his seasonal WCR with short term notes and his long-term growth with long-term debt. Right now his only LTD is the loan he took out to buy out his business partner. In order to keep his costs down he also has to make sure he has enough cash to pay his supplies on time to get the 2% discount.

3. Assuming Mr. Butler makes 3.6 million in sales in 91. This is a $1 million increase from 1990, or 37%.

4. I would remind Mr. Butler that he sustainable growth rate only allows a company to expand as fast as its ROE. He should grow as fast as his ROE allows him to and then increase his borrowing using long term debt up to the point where the additional interest expense equals the cost of producing one more item.