Butler Lumber Company Case Study
Hoffmeister M-W 4:30 – 5:45
Butler Lumber Company
Summary of Facts. Butler Lumber Company is a Pacific Northwest based lumber distributor that sells plywood, moldings, and sash and door products. The sole owner of Butler Lumber is Mark Butler, accompanied by one administrative assistant and ten employees who focus on repairs and labor intensive work. Because of Butler Lumber’s competitive pricing scheme, it has seen rapid growth in the past few years. Due to the rapid growth and a shortage of cash in 1990, Butler Lumber Company is seeking to take out an additional loan in order for the business to sustain itself and grow in the coming years. Butler Lumber has the option to accept a loan of $250,000 from Suburban National Bank, or accept an unsecured revolving 90-day note of $465,000 at 10.5% interest from Northrop National Bank. If Mr. Butler decides to accept the note from Northrop National bank, it will sever the existing ties with Suburban National Bank and a new relationship must be maintained.
Problem. If Mr. Butler accepts the loan from Suburban National Bank, he must agree to a secured loan that is backed by his real property that will act as collateral for the agreed amount of $250,000. Due to Suburban National Bank’s constraints, Mr. Butler is looking to find a new banking relationship that would allow him to negotiate a much larger unsecured loan. The amount of the loan offered by Suburban National Bank has made Mr. Butler realize the company’s growth potential - increase in sales, but also realize the increase in debt. Since he is limited on his loan and has little cash on hand, he has turned to trade credit for the past few years. As consultants, we will investigate the following four key issues: * Should Butler Lumber sever ties with Suburban National bank in order to obtain a larger loan from Northrop National Bank? * Why does Butler Lumber have a cash shortage problem to begin with, and are they currently using their existing funds efficiently? * How much additional funding does Butler Lumber need, and will they continue to need even more in the future? * What sort of implications does the firm’s growth suggest? * Are there Alternative solutions to Butler Lumber’s cash shortage problems? Analysis. The need for cash is clear; however, there could be multiple opportunities to raise the capital that is needed. It is imperative that Butler Lumber takes into consideration the costs associated with accepting external financing, and in turn be able to assess whether or not it is the best solution. If relying on external financing is not plausible, Mr. Butler will have to search for alternative methods to grow his business - whether it’s finding a different financing solution or a way to generate cash by altering management activities. As we assess Butler Lumber’s operations from 1988 to 1990, it is clear that his reliance on trade credit and a specific focus on having a very competitive pricing schema has allowed the company to generate revenue up to this point. Although the company was able to generate revenue at an increasing rate during the given years, Butler Lumber was unable to accumulate any cash in order to fund operations moving forward. We will start by assessing one of the two immediately available options presented for Butler Lumber: Butler Lumber can remain with Suburban National Bank by accepting their loan offer of $250,000. The only apparent advantage of this option lies solely in the fact that the relationship with the bank already exists. The disadvantages are seen in the possibility that Butler Lumber will need additional financing past the initial loan amount, and the offered loan is now secured (backed by Mr. Butler’s real property), signaling that the bank has doubts that Butler Lumber will pay back the loan amount. Though Butler may be...
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