Background: Butler Lumber Company was founded in 1981, in a large city in the Pacific Northwest. Typical products of the company included plywood, moldings, and sash and door products. After a rapid growth in its business during recent years, the company in the spring of 1991 anticipated a further substantial increase in sales. Despite good profits the company experienced a shortage in cash and found it necessary to increase its bank borrowings.
•Butler Lumber Company is a profitable company. Why do they need external financing? •Butler Lumber Company is being offered a discount from its suppliers. Should they take the discount? •Project their Income Statement and balance sheet for all of 1991. -If they take the discount
-If they do not take the discount
Analysis: Butler Lumber Company is a profitable company, anticipating a substantial increase in sales in the spring of 1991; despite being profitable it is experiencing a shortage in cash and finds it necessary to increase its bank borrowings. The company needed funds as it was noted that there was a rapid increase in the Butler Lumber’s account and notes payable in the recent past especially in the spring of 1991. Also the company took few trade discounts in the past 2 years as Mr. Butler purchased the interests of his partner which created further shortage of funds for the company. Analyzing the sources and uses of cash in the company (exhibit 4), it is evident that external financing is needed because the company is growing faster than the growth rate sustainable by the retained earnings. Exhibit 4 is showing the analysis of sources and uses of the cash. The company is mainly using its cash under inventory and the account receivable heads and the main source of cash is accounts payable and retained earnings. Accounts receivable have increased from 19% to 45% of the used cash and inventory increased from 33% to 43.6% from 1989 to 1990 (exhibit 4).In the same...