Case: Clarkson Lumber Company

1) Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability?

• The company's inability to receive payments from customers in a timely manner created a severe impact in the company's cash flows. The age of account receivables increased each year. In 1993, the AR collection period was 38 days, followed by 43 days in 1994. Then in, 1995 it took 49 days on average to receive payments from customers.

• Because of the delay in accounts receivable, Clarkson Lumber's ability to pay suppliers on time is also impacted. You can see the vitality in the payables from 1993- 1996. In 1993, the AP in 1993 was 35 days, followed by a large increase to 47 days in 1994. In 1995 it took Clarkson 40 days on average to pay its suppliers which got better from the previous year, then slightly went up in 1996. The increase/decrease in AP and AR seemed to fluctuate and align together.

• Though the net sales are increasing year after year, the amount of inventory that Clarkson has on hand at the end of each year is increasing. in 1995, the ending inventory as a percentage of sales is 13%. That is at least 1 percentage point higher than both the low and high-profit outlets. With the track record of increasing that percentage by .5% each year, they are on track to have 13.5 percent which is again is higher than both the low and high-profit outlets.

• Due to the constant increase in inventory year after year, that has caused an increased in accounts payable. If Clarkson were to look at the industry averages and hold less inventory, his AP would be much lower due to less cost of inventory. You can see from the Cash Flow Statement below that from 1994-1995 there was a $60,000 increase in inventories.

• Mr. Clarkson has to take the time to work with his customers in terms of payment. Over the past 4 years, the collection period for Clarkson Lumber has increased 11 days. If he were able to negotiate better terms, he would be able to decrease his...