The Butler Lumber Case
The Butler Lumber company is facing cash difficulties due to the buyout of Henry Stark’s share and because it is operating a high growth rate. Thus, it is imperative to analyze the various options available to Mark Butler in order to meet the cash needs of the Butler Lumber Company.
In order to support the reasoning for our recommendation, we constructed a ratio analysis (Appendix I; Exhibit 1). Even though the firm has realized increasing sales and decreased its operating and cash cycle, other factors were found to have contributed to the shortage of funds. From the analysis, we were able to conclude that the main reasons for the firm’s insufficient funds were due to its slower collection of accounts receivable, higher costs of goods sold, heavy reliance on debt financing and most importantly a growth rate that is not sustainable. From Exhibit 1 in the Appendix, the current and quick ratios have been declining since 1988; furthermore, the quick ratio is less than 1, which indicates that the firm is deeply reliant on its inventory to meet the payments of its current liabilities. This is a problem since more inventory means more cash tied up in less liquid assets, which decreases the firm’s cash. Secondly, when analyzing the firm’s profitability, ROA increased by 3% from 1989 to 1990, but this was mainly due to the increase in total asset turnover which increased from 3.03 to 3.23 (Exhibit 1). Another component of ROA, net profit margin, declined from 1.69% to 1.63% (Exhibit 1). This is indicative of the fact that, asset turnover is higher due to higher sales. However, net profit margin indicates that in addition to the increase in sales, cost of goods sold increased at a greater rate than sales. This is an important factor because both higher sales and higher costs lead to diseconomies of sales, which is another reason for the shortage of funds that the company is facing. Thirdly, an important part of the assets that
In order to support the reasoning for our recommendation, we constructed a ratio analysis (Appendix I; Exhibit 1). Even though the firm has realized increasing sales and decreased its operating and cash cycle, other factors were found to have contributed to the shortage of funds. From the analysis, we were able to conclude that the main reasons for the firm’s insufficient funds were due to its slower collection of accounts receivable, higher costs of goods sold, heavy reliance on debt financing and most importantly a growth rate that is not sustainable. From Exhibit 1 in the Appendix, the current and quick ratios have been declining since 1988; furthermore, the quick ratio is less than 1, which indicates that the firm is deeply reliant on its inventory to meet the payments of its current liabilities. This is a problem since more inventory means more cash tied up in less liquid assets, which decreases the firm’s cash. Secondly, when analyzing the firm’s profitability, ROA increased by 3% from 1989 to 1990, but this was mainly due to the increase in total asset turnover which increased from 3.03 to 3.23 (Exhibit 1). Another component of ROA, net profit margin, declined from 1.69% to 1.63% (Exhibit 1). This is indicative of the fact that, asset turnover is higher due to higher sales. However, net profit margin indicates that in addition to the increase in sales, cost of goods sold increased at a greater rate than sales. This is an important factor because both higher sales and higher costs lead to diseconomies of sales, which is another reason for the shortage of funds that the company is facing. Thirdly, an important part of the assets that