September 22, 2011
Clarkson Lumber appears at first glance to be a healthy, successful company with increasing sales and rapid growth. Clarkson Lumber has relatively low operating cost, allowing them to give competitive prices, which results in their increasing sales. However, even with continual increases in sales, Clarkson Lumber has a constant cash flow problem that can be credited to several factors with the result of looking for additional funding to buyout his old partner and expand his business. Clarkson is currently overusing his short-term debt and has maxed out his current line of credit with Suburban National with a $399,000 loan. Clarkson has been able to stay within Suburban’s line of credit by relying heavily on trade credit. Clarkson is now looking to open a new line of credit with Northrup Bank which would extend his line of credit to $750,000.
Along with the constant increase in sales, Clarkson Lumber is suffering from an increase in inventory to sales ratio, lower profit margins and increase in accounts receivables to sales ratio (exhibit A). Although, Clarkson Lumber gives most of its customers a 30 day credit term, accounts receivables to sales in 1995 was averaging close to 49 days to receive payments. The inability to receive payments on time severely impacts the company’s cash flow as well as delays Clarkson’s payments to suppliers. In 1995 accounts receivables increased to nearly 14% of sales which is higher than the industries low-profit outputs of 13.7%.
Another problem Clarkson Lumber has it the increase in inventory to sales ratio. Inventory as a percent of sales in 1995 was 12.99% which put it above the industry standard of 12% for low-profit outlets and 11.6% of high-profit output. This is an increase of nearly 2% from 1993. With the projected sales of $5.5 million in 1996, Clarkson Lumber would be forced to increase its amount of debt to reach its projected sales....