Clarkson Lumber

Topics: Cash flow, Financial ratio, Inventory Pages: 3 (914 words) Published: February 18, 2006

TO: John Doe
President, Northrup National Bank
FROM: George Dodge
Loans Officer, Northrup National Bank

Clarkson Lumber Company is owned and operated by the hardworking, 49-year-old Mr. Clarkson. It has low operating expenses, a small staff, and strong management. The overall impression is one of a conservative, efficient operation. Clarkson himself leads a frugal lifestyle with little personal debt.

Clarkson Lumber is a company experiencing rapid growth but with a constant cash flow crisis. This is not an unusual confluence, but it does require some financial decision-making. Their current state of under financing makes a number of their ratios look poor.

There are several reasons for the cash flow problems at Clarkson Lumber. One is Mr. Clarkson's decision in 1994 to buy out his partner Mr. Holtz. The note had 4 semi-annual installments of $50,000 beginning June 30, 1995 with an 11% interest rate. Clarkson Lumber is not generating enough profit to pay off this debt in such a short space of time. Basically the debt repayment terms do not match the financial strength of the business. As of today there are 2 remaining payments to be made on this note, June 1996 and December 1996.

The ceiling of $399,000 in borrowing ability placed on the company by the Suburban National Bank is consistently insufficient to meet their growing needs. Sales have increased from $2,921,000 in 1993 to $4,519,000 in 1995. This is an increase of 54%. In addition Clarkson has demonstrated an ability to stay within Suburban's $400,000 limit only by relying heavily on trade credit.

In addition, from their financial statements, it appears that they made substantial property purchases in 1995 ($126,000). These were financed them with their revolving loan. One can assume that this expense was a result of their significant increase in sales, but it is generally not a good cash management strategy to use...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Feasibility Marketing Plan
  • Essay on Text Analysis the Lumber-Room
  • Analysis of “the lumber room” by H. Munro Essay
  • A Brief Analysis of the Hayward Lumber Company’s Environmental Strategy (Case Study) Essay
  • Lumber Room Essay
  • The Lumber-Room Research Paper
  • Plot and Precis of the Lumber Room Essay
  • Lumber Commodity Essay

Become a StudyMode Member

Sign Up - It's Free