Working Capital Case Study: Clarkson Lumber
Clarkson Lumber Company
1. Identify the key problem in the case and explain why it is the key problem.
Clarkson Lumber Company’ sales have been growing quickly over the last couple of years. Growths in working capital necessities have surpassed the capacity of the company to produce funds by itself. Also, part of the finances was used to buy out a partner, further raising the pressure.
The company couldn’t appreciate discounts on accounts payable and started borrowing larger funds from the bank in order to keep up its development. The issue Mr. Clarkson is facing is how can he raise capital necessary to support the expansion. In order to achieve that he needs a higher line of credit, which he is trying to get from a different bank. The Northrup National Bank has to evaluate the risks associated with lending money to the lumber company, as well as what amount is needed and what repayment schedule is appropriate.
2. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability?
Clarkson Lumber Company had to increse borrowings because its net income is growing at a slower rate than its operating expanses. The need for additional funds is also required for the purchasing power of goods to match the increased demand. The pressure is even higher because Mr. Clarkson has a financial obligation towards Mr. Holtz. Another reason is the difference we notice between the end of the year 1993 and 1995 in extended collection period. Considering the current ratio and quick ratio declines, the firm’s situation could easily get worse if its profitability was to drop and the funds would shrink further.
3. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated?
In 1993, Mr. Clarkson used mostly accounts payable to his suppliers and employees and a term loan as ways of financing. In 1994, the company borrowed from a bank in form of a
1. Identify the key problem in the case and explain why it is the key problem.
Clarkson Lumber Company’ sales have been growing quickly over the last couple of years. Growths in working capital necessities have surpassed the capacity of the company to produce funds by itself. Also, part of the finances was used to buy out a partner, further raising the pressure.
The company couldn’t appreciate discounts on accounts payable and started borrowing larger funds from the bank in order to keep up its development. The issue Mr. Clarkson is facing is how can he raise capital necessary to support the expansion. In order to achieve that he needs a higher line of credit, which he is trying to get from a different bank. The Northrup National Bank has to evaluate the risks associated with lending money to the lumber company, as well as what amount is needed and what repayment schedule is appropriate.
2. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability?
Clarkson Lumber Company had to increse borrowings because its net income is growing at a slower rate than its operating expanses. The need for additional funds is also required for the purchasing power of goods to match the increased demand. The pressure is even higher because Mr. Clarkson has a financial obligation towards Mr. Holtz. Another reason is the difference we notice between the end of the year 1993 and 1995 in extended collection period. Considering the current ratio and quick ratio declines, the firm’s situation could easily get worse if its profitability was to drop and the funds would shrink further.
3. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated?
In 1993, Mr. Clarkson used mostly accounts payable to his suppliers and employees and a term loan as ways of financing. In 1994, the company borrowed from a bank in form of a