Butler Lumber Case

Butler Lumber Case Questions

1- Why does the co. need more credit? (4,0)

We can say that Butler Lumber Co. need more credit by analyzing their Balance Sheet. Since 1989, the NFO (Need of funds for operations) is higher than the working capital, meaning that the company needs credit to finance their operations. Until the first quarter of 1991 the company needed a line of credit of $216,000.00. When forecasting the entire year of 1991, the company will need a line of credit of $384,000.00. In 1992 this line of credit should be around $482,000.00. Their current line of credit at the Suburban National Bank is $247,000. This means that the company needs more credit.

2- What are your recommendations to Mr. Butler? Should he continue his growth plans? Should he reduce expansion speed? Other recommendations? (2,0)

After analysing the number, we came to a conclusion that Mr. Butler should change his strategy. The company has had a high growing path in the recent years, but the profitability ratios show us that their profits are shrinking. Return over sales, equity and assets had been decreasing over time. In addition to that, if they continue with their growing plans, they will need a line of credit impossible to get for a company of their size. If this happens they wouldn’t have only a profitability problem but also a cash flow problem. So we think that he should reduce the expansion speed and find a way to reduce their credit need. Another recommendation would be for him to focus on their margins. Even with the expansion and the higher purchase volume, their COGS had been also increasing over time in relation to sales. This is the reason for the decrease in margins and profits.