Butler Lumber

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Butler Lumber

After thorough review and analysis of Butler Lumber’s financial reports, I believe that it is in the best interest of Northrup National Bank to not only approve the requested $465,000 loan, but look to increase the loan amount. A review of the 5 C’s will show in more detail the decision to approve this loan:

1. Capacity/Cash Flow: Butler runs a lean operation that has allowed them to have success due to competitive pricing. They have met their financing needs by increasing their debt (notes payable) in order to keep up with the demand. However, their borrowing had led conjunctly to an increase in sales. Net sales have increased 59% over the 1988-1990 timeline and have been projected to increase by another 34% in 1991. From 1988-1990, for every $1000 borrowed, net sales increased by $4,278.96. By utilizing leverage, they have been able maintain their free cash flow and maintain their current ratio over 1.0. Although Free Cash Flow and current ratio have dropped over the past year, Butler has made large investments which have proven able to give a higher return, which will have significant payoff in the long run. By doing this, they will continue to have the ability to pay interest to debtholders, repay debtholders, and buy short-term investments. As business continues to grow, debt obligations will decrease and their current ratio will be back on the rise. (See Exhibit 1 and Exhibit 2).

Based on this analysis, I believe the estimate for the loans requirements is light. I believe it would be in the best interest to pursue rolling the $247,000 owed to Suburban National Bank onto this line of credit. With the increased projection in sales, you are also seeing an increase in cost of goods sold. However, that number could be dramatically reduced if Butler had the appropriate capital or credit line to take advantage of the 2% discount for payments made within 10 days of the invoice date. If total cost of goods sold will be roughly

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