I. Statement of Financial Problem
Butler Lumber Company, a growing profitable business has exhausted its credit limit and the key issues facing it are: 1. Need for additional funds to continue the growth 2. Need to consolidate debt 3. Need to improve cash flexibility.
In this case study I will be discussing following problem: Why has Butler Lumber been profitable in the increasing volume of sales but at the same time it is experiencing cash difficulties in 1988 – 1990? This is a historical problem and my calculations and assumptions are based on income statement and balance sheet for 1988 – 1990.
II. General Framework for Financial Analyses
There are different financial ratios and questions they answer:
• Liquidity ratio – current ratio: Will Butler Lumber be able to pay off his debts as they come due? Satisfactory liquidity ratio is necessary if Butler Lumber is to continue its operations.
• Asset management ratio: Does Butler Lumber have the appropriate amount of assets versus sales? How effectively is Butler Lumber managing its assets?
• Debt management ration: Does Butler Lumber have the right mix of debt and equity?
• Profitability Ratios: Are sales high enough? Do sales exceed the unit cost?
It is necessary to calculate different types of financial ratios to examine different aspects of Butler Lumber’s operations.
Key accounts for sources of funds for Butler Lumber Company are: retained earnings from previous years, cash accounts, accounts receivables and borrowing funds from bank
Uses of funds are: accounts payables, inventory, fixed asset accounts, buyout of Mr. Stark, long term and short term debt.
III. Applying of the financial framework
Before identifying the reasons in increasing/decreasing in sources/funds of cash, I have calculated following financial ratios to help understand the trends over the years of 1988 –...