Strategy in Action
"What are the basic problems this manager has to resolve?"
The company had experienced a shortage of cash and for that reason needs to increase its borrowing from Suburban National Bank to $247.000. The maximum loan that this bank would make was $250.000, and also need to secure the loan with its real property. The president of the company decides to look for a new banking relationship where he would be able to negotiate a larger and unsecured loan.
2. Note the key problems or issues on a pad of paper.
The Northrop National Bank is going to investigate Cartwright Lumber Company and look if it is possible to extend a line credit up to a maximum amount of $465.000.
3. Sort out the relevant consideration for each problem area. * There is a cash flow problem, which is reflected in the balance sheets. * While the Northrop National Bank was making the investigation, it gave particular attention to the debt position and current ratio of the business. It noted the ready market for the company´s product at all times and the fact that the sales prospects were favorable. * The bank also noted the rapid increase in Cartwright Lumber´s accounts and notes payable in the recent past.
4. Do appropriate qualitative and quantitative analysis.
The company had a shortage of cash, in the balance sheets at December 31, 2001-2003, and March 31, 2004, it is possible to see how the cash flow was reduced each year. In 2001, the cash was $58, in 2002 was $48, in 2003 $41 and in the first quarter of 2004 was 31. This means that the cash flow decreased at least 29 percent per year.
5. Develop a set of alternatives, supported by your analysis. If the Northrop National Bank will authorize the loan, some restrictions on additional borrowing would be imposed, that the net working capital would have to be maintained at an agreed-upon level, that additional investment in fixed...