Butler Lumber Company Background: Butler Lumber Company had been founded in 1981 in a suburb of a large city in the Pacific Northwest. The company s operations were limited to the retail distribution of lumber products. Their typical products included plywood, moldings, and sash and door products. Despite good profits Butler Lumber Company experienced a shortage in cash and found it necessary to increase its bank loans. Issues:
Why does a Profitable company such as Butler Lumber need external Financing? Should Butler Lumber Company accept the discount that is being offered from its suppliers?
Project the Butler Lumber Company s balance sheet and Income Statement for all of 1991 under two scenarios If they accept the discount If they don t accept the discount
Butler Lumber Company is a profitable company anticipating tremendous growth, and typical of a company in this phase of the business cycle, the cash needed to meet obligations outstrips its
inflow from operations. Butler s exponential growth has caused them to need external financing, because they can t self-fund their working capital needs. The might be able to mitigate some of this through better inventory management control such as squeezing their suppliers on credit terms or for increased volume discounts. Going forward their fixed costs will also help build economies of scale which should diminish their external financing demands in future fiscal periods. Butler is banking on a tremendous amount of future cash flows to be generated from its assets to help justify its value to shareholders, which is why stakeholders like the bank continue to extend additional credit lines. The company under the without the discount scenario utilized $105K to increase its sales position to maintain its average day s sales in cash it managed throughout earlier fiscal periods. A material portion was...