Case: Clarkson Lumber Company
The issues that Mr. Clarkson should consider when analyzing the future of his business are: •
Can the business support growing at such a high rate?
Is it a wise decision to continuing borrowing on an even higher line of credit? •
Is the business making wise choices in regards to whom it sells to?
The business cannot support the current rate of growth much longer. Mr. Clarkson has no choice but to infuse the business with outside cash right away, however he needs to seriously consider other forms of financing after that. He must reduce liabilities and debt before accruing more and being consumed with payments and interest payments. He should explore the possibilities of equity financing, in order to bring cash into the business. Such possibilities could include recommending to his brother in law to keep his money in the business and receive dividends. Another equity financing option would be to re-mortgage his home and invest his personal cash in the business. The best thing that could happen to Clarkson lumber would be to slow down growth and seek equity financing. Clarkson Lumber Company needs to have stricter policies on the customers they allow to purchase from them on credit.
The bank is projecting 5.5 million dollars, or more, in sales for Clarkson lumber in 1996. As seen in Exhibit 2.2 in the appendix, the company would blow through their new $750,000 line of credit too quickly. If the Clarkson Lumber sells $5.5 million and their percentage of sales were to stay the same for the balance sheet items, they would have a more than $460,000 increase in uses of cash, not including the $399,000 that they have outstanding on their previous line of credit. If you subtract the almost $200,00 that they would generate in new sources of cash you can see that the will already use over $666,000 of their $750,000. Consequently, if they grew at the same rate that they grew from 1994 to 1995, 30%,...
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