Clarkson Lumber

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Harvard Business School

9-297-028
Rev. October 29, 1996

Clarkson Lumber Company
After a rapid growth in its business during recent years, the Clarkson Lumber Company, in the spring of 1996, anticipated a further substantial increase in sales. Despite good profits, the company had experienced a shortage of cash and had found it necessary to increase its borrowing from the Suburban National Bank to $399,000 in the spring of 1996. The maximum loan that Suburban National would make to any one borrower was $400,000 and Clarkson had been able to stay within this limit only by relying very heavily on trade credit. In addition, Suburban was now asking that Mr. Clarkson guarantee the loan personally. Keith Clarkson, sole owner and president of the Clarkson Lumber Company, was therefore actively looking elsewhere for a new banking relationship where he would be able to negotiate a larger loan that did not require a personal guarantee.

Mr. Clarkson had recently been introduced by a friend to George Dodge, an officer of a much larger bank, the Northrup National Bank. The two men had tentatively discussed the possibility that the Northrup bank might extend a line of credit to Clarkson Lumber up to a maximum amount of $750,000. Mr. Clarkson thought that a loan of this size would improve profitability by allowing him to take full advantage of trade discounts. Subsequent to this discussion, Mr. Dodge had arrange for the credit department of the Northrup National Bank to investigate Mr. Clarkson and his company. The Clarkson Lumber Company had been founded in 1981 as a partnership by Mr. Clarkson and his brother-in-law, Henry Holtz. In 1994, Mr. Clarkson bought out Mr. Holtz’s interest for $200,000. Mr. Holtz had taken a note for $200,000, to be paid off in 1995 and 199 6 in order to give Mr. Clarkson time to arrange for the necessary financing. This note carried an interest rate of 11%, and was repayable in semi-annual installments of $50,000, beginning June 30, 1995. The business was located in a growing suburb of a large city in the Pacific Northwest. The company owned land with access to a railroad siding, and four large storage buildings had been erected on this land. The company’s operations were limited to the retail distribution of lumber products in the local area. Typical products included plywood moldings and sash and door products. Quantity discounts and credit terms of net 30 days on open account were usually offered to customers.

Sales volume had been built up largely on the basis of successful price competition, made possible by careful control of operating expenses and by quantity purchases of materials at substantial discounts. Most of the moldings and sash and door products, which constituted significant items of sales, were used for repair work. About 55% of total sales were made in the six months from April through September. Annual sales of $2,921,000 in 1993, $3,477,000 in 1994, and $4,51 9,000 in 1995 yielded aftertax profits of $60,000 in 1993, $68,000 in 1994, and $77,000 in 1995.

This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © 1996 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School.

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297-028

Clarkson Lumber Company

Operating statements for the years 1993-1995 and for the three months ending March 31, 1996 are given in Exhibit 1 .
Mr. Clarkson was an energetic man, 49 years of age, who worked long hours on the job. He was helped by an assistant, who in the words of the...
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