Cartwright Lumber Case

Cartwright

1. Why has Cartwright Lumber borrowed increasing amounts despite its consistent profitability?

Cartwright lumber has had to borrow substantial amounts of money due to the fact that the firm is a growing company with sales rising quickly. In order for the company to sustain this growth rate, they will have to get additional external funding. Growth in sales nearly doubled from 2001 to 2003, with a percentage growth of 18% and 34% in 2002 & 2003 respectively. While sales are growing steadily, the company’s cash is steadily decreasing year to year by 20% and 17% in 2002 and 2003. Taken together with the fact that accounts receivable has grown at a higher rate than sales, 30% & 42%, this firm can not support the growing sales relying on its assets. The DSO ratio for accounts receivable is 36.28, 39.70 & 42.36 in 2001, 2002, and 2003 respectively. With credit terms of 30 days, the DSO is showing that on average customers are not paying on time and year to year they are paying increasingly later. All these factors combined demonstrate poor management of the firm’s assets. This is the reason why the firm is primarily relying on its debts to sustain the increase in sales growth.

1. Although Mr Butler has seen an increase in his sales for the last few years, there are a few reasons why he needed a loan from the bank to keep his operations going.

1) Shortage of Cash: Despite good profits, Mr. Butler had experienced a shortage of cash from 1988 to 1990. During this period of time, there was a decrease in cash reserves, as well as in inventory turnover, indicating that Mr. Butler’s money had been tied up in his inventory. This can be resolved by working on his receivables turnover ratio, which decreased from 1988 to 1990, as seen in Appendix A.

2) Debt Consolidation: In late 1988, Mr. Butler took a loan of $70,000 that carried an interest rate of 11%. The annual interest payable to the bank compounded to his cash shortage problem.

3) Expansion of...