Issues
The issues that Mr. Clarkson should consider when analyzing the future of his business are:
• Can the business support growing at such a high rate?
• Is it a wise decision to continuing borrowing on an even higher line of credit?
• Is the business making wise choices in regards to whom it sells to?
Decision
The business cannot support the current rate of growth much longer.
Mr. Clarkson has no choice but to infuse the business with outside cash right away, however he needs to seriously consider other forms of financing after that. He must reduce liabilities and debt before accruing more and being consumed with payments and interest payments. He should explore the possibilities of equity financing, in order to bring cash into the business. Such possibilities could include recommending to his brother in law to keep his money in the business and receive dividends. Another equity financing option would be to re-mortgage his home and invest his personal …show more content…
As seen in Exhibit 2.2 in the appendix, the company would blow through their new $750,000 line of credit too quickly. If the Clarkson Lumber sells $5.5 million and their percentage of sales were to stay the same for the balance sheet items, they would have a more than $460,000 increase in uses of cash, not including the $399,000 that they have outstanding on their previous line of credit. If you subtract the almost $200,00 that they would generate in new sources of cash you can see that the will already use over $666,000 of their $750,000. Consequently, if they grew at the same rate that they grew from 1994 to 1995, 30%, their draw on their line of credit would be up to almost $725,000. As stated, these numbers are using the percentage of sales from 1995, if they continue to grow the uses of cash will be even higher. Accounts Receivable has increase from 10-13% from 1993 to