Wilson Lumber Company

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1.Introduction4
3.Analysis of the Forecasted Situation9
4.Suggestions and Their Analysis13
5.Conclusions and Recommendations16

Table of Figures
Table 1: Estimation of Selected Company’s Ratios5
Table 2: Cash Flow Statements for 2004 and 20056
Table 3: Major Ratios7
Table 4: Sustainable Rate of Growth8
Table 5: Attractiveness of Discounts9
Table 6: Proforma Income Statement9
Table 7: Proforma Balance Sheet10
Table 8: Cash Flow Statement11
Table 9: EVA Analysis12
Table 10: Income Statement under new Terms13
Table 11: Balance Sheet under New Terms14
Table 12: Cash Flow Statement under New Terms14
Table 13: EVA under New Terms15

1. Introduction

Wilson Lumber Company is a small company engaged in timber business. The company has one owner Mr Wilson, an entrepreneur, who is considered to be reliable partner and talented business man by his suppliers and customers. Mr Wilson originally established the firm with his brother in law, Henry Holtz, in 1991 but in 2004, bought out a part of Mr Holtz for USD200,000 payable in two equal parts over the next two years. Mr Wilson is willing to try a discount 2/10 net 30 provided by his supplies but the firm persistently faced cash shortage. At the same time, current credit line offered by the bank is not sufficient to take advantage of a discount. So Mr Wilson decided to negotiate new credit line with much high limit with another bank. Aim

The report aims to analyze the feasibility and viability of Wilson Lumber Company’s decision to increase the credit line in order to take advantage of discount and maintain high pace of sales growth. Objectives:

* Analyze the current situation
* Identify problem areas
* Analyze forecasted situation if the firm takes a loan
* Compare state of the company in both cases
* Propose some ways to improve the situation if necessary * Analyze how suggestions will reflect on the financial statements * Make final suggestion

2. Analysis of the Current Situation

Tables providing selected ratios and cash flow statements are provided below. Table 1: Estimation of Selected Company’s Ratios
Table -A| | | | |
 | 2003| 2004| 2005| 1st Quarter 2006|
Receivables % sales| 10.48%| 11.82%| 13.41%| 13.72%|
Inventory turnover| | | | |
Average inventory| 6.60| 6.85| 6.72| 5.35|
Year-end inventory| 6.53| 6.10| 5.83| 5.27|
| | | | |
Table -B| | | | |
 | 2003| 2004| 2005| 2006 (a)|
Net property % sales| 7.98%| 7.54%| 8.59%| 6.98%|
(a) Based on forecast sales of 5,5 million in 1996| | |
| | | | |
Table - C| | | | |
 | 2003| 2004| 2005| 1st Quarter 2006|
Total liabilities % total assets| 45%| 68%| 73%| 72%|

AR receivables rise despite a high pace of sales growth, hence the firm’s clients may not pay for longer period to improve their working capital management. It seems that the company’s credit management is not efficient enough. Taking a look at inventory turnover, it is clear that computation on average inventory base shows more stable results, it may be because of slight seasonality of sales, the majority of sales (55%) are made between April and September. The company’s fixed asset base is quite stable, as it was said by one of the partners the company does not invest a lot into “wasteful” plant investment. However, the most alarming seems to be the fact that the firm’s level of debt increased dramatically between 2003 and 2005. Let us now look at Cash Flow Statement to clarify the reason.

Table 2: Cash Flow Statements for 2004 and 2005

 | 2004| 2005|
Income| 68| 77|
change in AR| -105| -195|
change in inventories| -95| -155|
change in AP| 127| 36|
change in accruals| 3| 30|
CFO| -2| -207|
 |  |  |
change in net PP&E| -29| -126|
CFI| -29| -126|
 |  |  |
change in trade notes*| 0| 127|
change in bank notes | 60| 330|...
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