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    Working Capital Management at Butler Lumber Company

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    Ajay Singh Tomar
    Butler Lumber Company is a profitable company experiencing a shortage of cash despite good profits. An analysis of the company's financial statements from 1988-1990 and projected statements for 1991 found that increasing investments in inventory and receivables were responsible for the additional cash needs. The company is requesting a $465,000 line of credit from the bank but based on projections will require $627,000. Advice is sought on how to raise the $162,000 difference through long term debt or equity.

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    Working Capital Management at Butler Lumber Company

    Uploaded by

    Ajay Singh Tomar
    1K views10 pages
    Butler Lumber Company is a profitable company experiencing a shortage of cash despite good profits. An analysis of the company's financial statements from 1988-1990 and projected statements for 1991 found that increasing investments in inventory and receivables were responsible for the additional cash needs. The company is requesting a $465,000 line of credit from the bank but based on projections will require $627,000. Advice is sought on how to raise the $162,000 difference through long term debt or equity.

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    Butler Lumber Company is a profitable company experiencing a shortage of cash despite good profits. An analysis of the company's financial statements from 1988-1990 and projected statements for 1991 found that increasing investments in inventory and receivables were responsible for the additional cash needs. The company is requesting a $465,000 line of credit from the bank but based on projections will require $627,000. Advice is sought on how to raise the $162,000 difference through long term debt or equity.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    1K views10 pages

    Working Capital Management at Butler Lumber Company

    Uploaded by

    Ajay Singh Tomar
    Butler Lumber Company is a profitable company experiencing a shortage of cash despite good profits. An analysis of the company's financial statements from 1988-1990 and projected statements for 1991 found that increasing investments in inventory and receivables were responsible for the additional cash needs. The company is requesting a $465,000 line of credit from the bank but based on projections will require $627,000. Advice is sought on how to raise the $162,000 difference through long term debt or equity.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 10

    Working Capital Management

    Case: Butler Lumber Company

    Learning Objectives:
    To investigate the causes of liquidity problem in a
    profitable firm
    To estimate the amount of working capital finance
    To formulate an action plan for efficient working
    capital management to address the liquidity problem
    Working Capital Management
    at
    Butler Lumber Company

    “Despite good profits, Butler Lumber


    Company experienced a shortage of cash” –
    Why?
    Working Capital Management
    at
    Butler Lumber Company
    Sources and Uses of Funds 1988 to 1990
    ($ in thousands)
    Sources
    Notes payable, bank 233
    Accounts payable 132
    Accrued expenses 15
    Net worth 78
    Cash 17
    Total Sources 475
    Uses
    Notes payable, Mr. Stark 105
    Long-term debt 14
    Accounts receivable, net 146
    Inventory 179
    Property, net 31
    Total Uses 475
    Working Capital Management
    at
    Butler Lumber Company

    What insight into the financial condition of the


    company can be obtained based on current ratio,
    quick ratio and net worth to total assets ?
    Working Capital Management
    at
    Butler Lumber Company

    What factors are responsible for additional funds


    invested in inventory and receivables?
    Butler Lumber Company
    Net Sales ( thousands of dollars)

    Actual Actual Actual Projected


    1988 1989 1990 1991
    Net sales 1697 2013 2694 3600
    19% 34% 34%
    Butler Lumber Company

    When Mark Butler discussed the proposal for the line of


    credit of $465,000 with the Credit Department of the
    Northrop National Bank, he was asked to submit the
    following details:

    1. Projected Financial Statements


    2. Evaluation of Cash Conversion Cycle
    Butler Lumber Company
    Exhibit 1
    Operating Statements for Years Ending December 31, 1988-1990,
    and Projected Statement for Year Ending December 31, 1991 (thousands of dollars)
    Projected
    1988 1989 1990 1991
    Net sales 1697 2013 2694 100.00% 3600
    Cost of goods sold
    Beginning inventory 183 239 326 418
    Purchases 1278 1524 2042 75.80% 2729
    1461 1763 2368 3147
    Ending inventory 239 326 418 15.52% 559
    Total cost of goods sold 1222 1437 1950 2588
    Gross profit 475 576 744 1012
    Operating expense 425 515 658 24.42% 879
    Interest expense 13 20 33 60
    Add purchase discount 42
    Net income before taxes 37 41 53 115
    Provision for income taxes 6 7 9 19
    Net income 31 34 44 95
    Butler Lumber Company
    Exhibit 2
    Balance Sheets at December 31, 1988-1990,
    and Projected Balnce Sheet at December 31, 1991 (thousands of dollars)

    1988 1989 1990 1991


    Cash 58 48 41 1.52% 55
    Accounts receivable, net 171 222 317 11.77% 424
    Inventory 239 326 418 15.52% 559
    Current assets 468 596 776 1037
    Property, net 126 140 157 5.83% 210
    Total assets 594 736 933 1247
    Notes payable, bank 0 146 233 627
    Notes payable, Mr. Stark 105 0 0 0
    Notes payable, trade 0 0 0 0
    Accounts payable 124 192 256 9.50% 75
    Accrued expenses 24 30 39 1.45% 52
    Long-term debt, current portion 7 7 7 7
    Current liabilities 260 375 535 761
    Long-term debt 64 57 50 43
    Total liabilities 324 432 585 804
    Net worth 270 304 348 443
    Total liabilities and net worth 594 736 933 1247
    Butler Lumber Company
    Questions:
    Please prepare a note showing (a) Days Inventory Held (DIH),
    (b) Days Sales Outstanding (DSO), (c) Days Payables
    Outstanding (DPO) and (d) Cash Conversion Cycle for the years
    ending December 31, 1990 and December 31, 1991 and offer an
    action plan to manage the inventory, receivables and payables.
    Mr. Butler said the projections were made using “percent of
    sales method”. Please check the calculations and offer your
    comments on the correctness and reliability of projections.
    If the projections are acceptable, the requirement of bank finance
    is $627,000 as against the proposed $465,000. How would you
    advise Mr. Butler to raise the differential amount of $162,000?
    Long Term Debt? Equity?

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