Clarkson Lumber Company has been in growth during recent years and anticipated a further increase in sales. Despite of consistent profits, the company has suffered shortage of cash and borrowed fund needed for its business growth. Question #1
Increasing amount of borrowing despite of its consistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 60% from 1993-1995, the assets that support increase of sales increased by 78% (Exhibit 1 & 2). The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995 (Exhibit 2). The gross profit margin and operating expenses/profit have been stable over three years, however, interest expenses/sales has increased almost 1.5 times (Exhibit 2). The firm’s net profit margin deteriorated again and as a result, the firm has experienced the shortage of fund regardless of its consistent profitability. Second is the amount of note payable against Holtz. Mr. Clarkson bought out Mr. Holtz’ interest for $200,000 paid off in 1995 and 1996. Because of this cash outflow, the company needed cash inflow from bank. Thirdly, the company’s collection period5 (48.94 in 1995 and 38.23 in 1993) and inventory turnover (5.83 in 1995 and 6.53 in 1993) are deteriorated as well. Therefore, Clarkson Company need to solve financial problems by using financial statement (F/S), common sized, pro forma F/S and ratio analysis. Question #2
Mr. Clarkson has met the financing needs of the company during 1993 through 1995 by borrowing on bank loans. The financial strength of Clarkson Lumber has seen one major area that has caused the deterioration in the company: current liabilities have increased drastically as a percent of assets. This is also demonstrated in the current ratio, which has decreased substantially, showing a major change (decrease) in the...
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