Clarkson Lumber Case Study
Clarkson Lumber Company
Situational Overview: Clarkson Lumber Company or the “Company” has encountered financial troubles in the midst of expanding revenues. In order to satisfy the demands of expansion and continue growing top line revenue, an increased amount of borrowing is necessary. This increased borrowing will be in the form of a revolving line of credit with an interest rate of 11%. The following paragraphs will examine what has led to the Company’s current illiquidity and what can be done to remedy this issue.
1. Clarkson Lumber Company has seen continued profitability; however, due to perhaps an increase in scale, the Company takes longer to collect its accounts receivable. While revenue grew 19% and 30% from 1993 to 1994 and from 1994 to 1995, respectively, accounts receivable grew at a disproportionately faster rates of 34% and 47%. This leads to illiquidity since the company cannot pay its suppliers on time to take advantage of trade discounts. This is shown in Payables/Purchases per day increasing from 35.3 to 47.1. In addition, the Company is still paying cash to the previous equity owner after he sold his stake to Mr. Clarkson. This is a further use of cash which leads to additional decrease in liquidity. In order to pay his suppliers on time and pay his previous partner, Mr. Clarkson took on an additional notes payable from the bank from 1994 to 1995.
2. Due to illiquidity and the need to pay Mr. Hotz, Mr. Clarkson has put additional leverage on the company in the form of larger borrowing from the revolver. The revolver increased 550% from 1994 to 1995 from $60 to $390. In addition, Mr. Clarkson has also taken longer to pay his suppliers, transferring the delay from an increase in accounts receivable to a delay in paying accounts payable, and even taking on trade payables in the form of interest bearing notes. Although this does allow Mr. Clarkson to continue operating his business, prolonging payables is not a long-term financially sound
Situational Overview: Clarkson Lumber Company or the “Company” has encountered financial troubles in the midst of expanding revenues. In order to satisfy the demands of expansion and continue growing top line revenue, an increased amount of borrowing is necessary. This increased borrowing will be in the form of a revolving line of credit with an interest rate of 11%. The following paragraphs will examine what has led to the Company’s current illiquidity and what can be done to remedy this issue.
1. Clarkson Lumber Company has seen continued profitability; however, due to perhaps an increase in scale, the Company takes longer to collect its accounts receivable. While revenue grew 19% and 30% from 1993 to 1994 and from 1994 to 1995, respectively, accounts receivable grew at a disproportionately faster rates of 34% and 47%. This leads to illiquidity since the company cannot pay its suppliers on time to take advantage of trade discounts. This is shown in Payables/Purchases per day increasing from 35.3 to 47.1. In addition, the Company is still paying cash to the previous equity owner after he sold his stake to Mr. Clarkson. This is a further use of cash which leads to additional decrease in liquidity. In order to pay his suppliers on time and pay his previous partner, Mr. Clarkson took on an additional notes payable from the bank from 1994 to 1995.
2. Due to illiquidity and the need to pay Mr. Hotz, Mr. Clarkson has put additional leverage on the company in the form of larger borrowing from the revolver. The revolver increased 550% from 1994 to 1995 from $60 to $390. In addition, Mr. Clarkson has also taken longer to pay his suppliers, transferring the delay from an increase in accounts receivable to a delay in paying accounts payable, and even taking on trade payables in the form of interest bearing notes. Although this does allow Mr. Clarkson to continue operating his business, prolonging payables is not a long-term financially sound