Mr. Butler has distinguished himself in the market by having the lowest prices available. In order to keep up with industry demand, Mr. Butler has to finance his exponential growth through external financing. While Mr. Butler does reinvest all of his net profit back into the business, it is not a substantial enough to support this growth, due to the small net profit margins.
Mr. Butler believes that his new loan of $465,000 is more than enough to cover his future financing needs. However, we disagree with this assumption. If Mr. Butler enters into this new loan with Northrop National Bank, he will have to pay-off his Suburban National Bank loan in the sum of $247,000. After his has paid Suburban National Bank, he will need to pay-off the notes payable trade of $157,000. After these two transactions, Mr. Butler is left with a mere $61,000 of external financing. With the considerable growth that Butler Lumber is expected to see in the next few years, $61,000 will not be enough to fund this increase in sales. With financing the business aside, Mr. Butler also has to continue paying out his brother in law, in the amount of $7,000 a year. …show more content…
Butler’s financial advisor, we would advise against his anticipated plans for expansion, funded by additional debt. While Butler Lumber has distinguished themselves in the market by their low prices, we recommend that Mr. Butler raises his prices closer to an industry average. At the current price level, Butler Lumber is expected to have sales double in the next five years, which would likely not be financially sustainable for the business. Raising prices will not only increase net profit margins, but will slow the growth of Butler Lumber to a more manageable