1. Why has Butler Lumber borrowed increasing amounts despite its consistent profitability? How has Mr. Butler met the financing needs of the company during the period 1988 through 1990? (It would be helpful to develop a cash flow analysis (use vs. source) and the cash flow statement based upon the income statement and the balance sheet provided in the case for the period of 1988 to 1990.) Through the period of 1988 to 1990 Mark Butler has met the needs of financing through decreasing the amount of cash the company carries, by increasing bank loans, by increasing the size of accounts payable, and by carrying net income over into retained earnings. The needs of this cash was generated by the loan to Mr. Stark as M.B. needed this money to buy out Mr. Stark’s share in the company, an increase in account receivable, an increase in inventories, and an increase in fixed assets. Working capital turned out to make up a use of 68% during the years 1988 to 1990. The buy out of Mr. Stark made up 22% of the use of cash. Source bank note payable 49%, trading credit 28%, retained earnings 16%. All in all Mr. Butler has been using the wrong sort of financing to raise funds. If you were to make a comparison as to how Mr. Butler has been generating funds thus far it would be like financing a mortgage with a credit card.
2. Has the financial strength of Butler Lumber improved or deteriorated? The ratios show that the strength of Butler Lumber is slowly deteriorating. Their current ratio has been slowly going down from 1.8 to 1.2, if this continues it will only be a matter of time until Butler Lumber will no longer be able to cover their current liabilities with their current assets. Along with this the company is growing more and more leveraged from 54.5% in 1988 to 71.4% in 1992. As their working capital decreased through the years and into the projection BL average payment period is increasing from 35 days to 47 days. It will not be long until their vendors grow tired of the...
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