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Butler Lumber Company 
 
Category: Case Study Analysis | Word(s): 644 | Page(s): 3 | View(s): 2054 | Rank: 0
 
Case Study Objective: As Mr. Butler’s financial advisor, would you
give urge him to go ahead with, or reconsider, his anticipated
expansion and his plans for additional debt financing? As the banker,
would you approve Mr. Butler’s loan request, and, if so, what
conditions would you put on the loan.

The maximum loan that the Butler Lumber Company (BLC) could obtain
from Suburban National was $250,000 in which his property would be
used to secure the loan. Northrop National Bank offered BLC a line of
credit of up to $465,000. BLC would have to sever ties with Suburban
National if they were to have this LOC extended to them.

As Mr. Butlers financial advisor, I would advise him to take the loan in an
attempt to grow the business. One alarming fact about his business is
the lack of a sales staff, yet the revenue has been able to grow at a fast
pace; 18% in 1989, 34% in 1990, 19% in 1991. By adding another an
experienced salesman that is working for a base salary plus
commission, they can grow the revenues even more. By having this
person work on commission, this will eat into the profit margin for the
materials he is selling. But the net impact to the BLC will be positive. I
would advise Mr. Butler to select the LOC for up to $465,000 because he
can take out as little as he needs. He does not need all $465,000 this
quarter, but he may need some in the first and last quarters of the year
because he obtains 55% of his revenues in the second and third
quarters. So it is strategically important for him to have access to this
capital because of the nature of his cyclical business.
As a banker, I would not grant BLC a LOC for $465,000. This is too much for a company this size, and with such little equity. The bank
is too aggressive with its forecast that BLC will have revenues of $3.6 million in 1991. I believe I am aggressive in forecasting they will
have $3.2 million in revenue in 1991, $400,000 less than what the bank forecasted. I came up with $3.2m by taking the 1st quarter
revenue of $718,000 which is historically approximately 22.5% of the yearly revenue. Assuming this holds true again in 1991, the annual
revenue in 1991 will be around $3.2m. This is a 19% year over year increase in revenue for BLC, which is inline with their year over year
growth in 1989, and less than the 34% in the best year, 1990.

The margins are not great for this industry, and BLC is no exception. Even with the excellent year over year growth in revenues for this
company, BLC is on pace for another dismal year of net income in the high $40k. The net income for this company has been constant;
$31k in 1988, $34k in 1989, $44k in 1990, and an estimated $49k in 1991. Net income of this size should not warrant extending a line
of credit to this company. As the banker, I would not grant a LOC or any other type of loan this size. I would consider granting this
company a smaller LOC with the similar stipulations of maintaining an appropriate working capital amount, fixed asset purchases
would need bank approval and that Butler would put up personal property and his insurance policy as collateral for the loans that the
business takes.
 
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