B RADY CLIFFORD
Clarkson Lumber Company, owned by Mr. Keith Clarkson, has been in business for 15 years and currently has 15 employees. Firms who have worked with Clarkson speak very highly of him, saying that he is conservative and his operating expenses are low. The company’s revenues are projected to continue to grow. Recently, Clarkson Lumber’s accounts payable and notes payable have increased significantly. The company has not been able to take advantage of trade discounts in recent years because of lack of funds and because of investments due to the company’s growth.
While Clarkson Lumber has been increasingly profitable in recent years, the company has found the need for additional financing. Clarkson’s current bank will not provide more than $399,000 in financing without a personal guarantee. Clarkson is hoping to secure more financing in order to improve profitability by taking full advantage of trade discounts. The company is working with Northrup National Bank to possibly secure a larger loan; up to $750,000. Northrup’s credit department is currently investigating Clarkson Lumber to see if the firm qualifies for this additional financing.
Our team has identified several key issues with Clarkson Lumber’s current financial situation. The company’s over-arching financial issue is cash flow. Clarkson is borrowing too much to make up for a cash flow shortage. Clarkson’s accounts receivable is increasing and the company is still using a 2% accounts payable discount, which is contributing to the lack of available cash. The cash flow that the company does have is being used inefficiently as the sources of cash comes from financing. Thus, Clarkson Lumber is growing at an unsustainable rate and is too reliant on short-term financing. Even if Clarkson receives the $750,000 from Northrup, the company will eventually be bankrupt if it does not curtail its growth rate. We recommend that the company utilize more long-term debt instead of short-term debt. Long-term financing will require smaller payments at lower interest rates, which will increase
CLARKSON LUMBER CASE STUDY - FINAN 6022-002 • PAGE 1
Clarkson’s cash flow. Clarkson may benefit from reducing inventory by increasing sales or reducing inventory growth. Another option would be to lower costs by negotiating cheaper prices with suppliers. Both options will increase the company’s cash flow. Finally, we recommend increasing accounts receivable turnover. With an increase in account receivable turnover, Clarkson will experience quicker collections and will not have to pay as much in finance charges, again leading to additional cash flow.
The approval process for the loan from Northrup National Bank, required that investigators be sent to research Mr. Clarkson and his company. The investigation pointed out a few important financial aspects of the company that are worth mentioning. In 1994, Mr. Clarkson bought out the other company partner for $200,000. This amount was to be paid off in 1995 and 1996 using semi-annual payments at an interest rate of 11%. From 1993 to 1995, net sales volume for CLC has increased from 2.9 million to just over 4.5 million. After yield profits for the same years also increase from $60,000 in 1993 to $77,000 in 1995 (see Exhibit 1). The investigation also paid special attention the debt position and current ratio of CLC. It was reported that sales are expected to reach $5.5 million in 1996 and could be more if the prices of lumber rise. Despite these profits, there was a shortage in cash which lead to an increase in borrowing. In order to stay within the borrowing limits set by Suburban Nation Bank, a lot of borrowing was being done through trade credits. In 1995 and 1996 this trade debt was rapidly increasing and was creating some concern. If the market is struggling then trade credit is normally not...