Butler Lumber Case Company

Cases in Corporate Finance

Finance 357

Butler Lumber Company

1-21-2014

Butler Lumber Company’s need for additional financing is a product of their low cash flows. Butler does not have enough money to pay their short term debts, and thus they are looking to take out a large credit to pay off their accounts. Butler’s cash flow issue stems from the deterioration of their accounts receivable collection polices and poor inventory management. Their collection of accounts receivable ratio (compared to their net sales) has decreased each of the last three years, from 1988-1990. Better collection policies would help the company increase the amount of cash they have on hand for a certain time period. Butler’s management of inventory has also been poor. The low profit margins would suggest the need for high asset turnovers, which they have not been getting for the past three years.

To combat the issue of having low cash flows, Butler Lumber Company has two options. The first option is that Butler can accept Dodge’s proposal of a secured, revolving 90-day note of up to $465,000. This option is very appealing to Mark Butler because of the flexibility offered by this source of credit. Butler can also solve its short term cash flow problems by accepting the loan from Dodge. However, this option will continue to increase the already high amount of money owed towards current liabilities for Butler. This could potentially lower the current ratio (current assets to current liabilities) below one, indicating that Butler would not be able to pay off their current liabilities if they became due in 1991. The floating interest rate of 10.5% will also increase the amount of money Butler puts towards interest expenses. This will lead to a direct decrease in Net Income. By borrowing money from Northrop Bank, Butler would also sever ties between them and Suburban National Bank, which could create issues for Butler in the future. The second option for Butler is to refuse the offer...