Butler

I. Statement of Financial Problem

Butler Lumber Company, a rapidly growing lumber products and retail distribution organization, faced a critical challenge that would determine its future success and level of profitability. A cash shortage due to restrictions set by its current source of funds, Suburban National Bank. Because of these restrictions, Butler Lumber began to explore other funding sources in order to enhance its current business model and satisfy the high demand of its products. As a possible solution, Butler Lumber looked to a larger bank, the Northrop Bank, which had the potential to offer the company $465,000, nearly double the amount offered by its current lender. Although the idea of moving to a larger financial institution initially sounded appealing, a major financial problem needed to be addressed. Primarily, why the forecasted figures shown on the income statement differed from the results provided on the balance sheet.

II: General Framework for Financial Analysis

There are several factors that can contribute to differences between a forecasted income statement and actual balance sheet results. Mainly:

* Changes to key accounts: As shown in Exhibit 1 & Exhibit 2, there are key accounts that appear on an organization’s financial statements that may cause differences between forecasted and actual results.

* The cash account. Cash demonstrates an organizations financial strength and is tied to a critical success factor: sales. Sales are the starting point on the organization’s operating statements. If sales do not reach or even exceed the estimate already forecasted, then actual results will vary.

* Accounts payable and accounts receivable. Both can be unpredictable and cause variations between forecasted and actual results. Included in Exhibit 1 are other accounts that may also contribute to differences between forecasted and actual results.

* Changes in financial risk: Depending on the direction of an...