Butler Lumber Company
Introduction
Butler Lumber Company is an owner operated corporation. In the late 1980’s it faced tremendous sales growth. The growth in sales resulted in increase in funding needs. The shortage of funds forced the company to forgo cash discounts on trade credit. Mr. Butler, the owner-manager, is looking for a new source of funding.
The main issues under consideration are:
1) Is the need for funding a short-term one or long-term in nature?
2) Is the bank’s offer of $465,000 revolving credit enough?
3) Should Butler Lumber Company take the cash discounts on trade credit even if it has to borrow from a bank?
4) Should BLC borrow and pursue the expansion?
Financial Condition of Butler Lumber Company
Liquidity: Current ratios of BLC varied from 1.80 in 1988 to 1.45 in 1990. Quick ratios were 0.88 in 1988 and decreased yearly to 0.67 in 1990. BLC has not defaulted. But it was unable to take cash discounts on trade credit. While the current ratios of above 1 indicate adequate liquidity, the decreasing trend is worrisome especially given the low quick ratios. But BLC covers its interest expenses 2.6 times in 1990 although the trend for TIE is also worsening. Please see the attached schedules Selected Ratios.
Asset Utilization: Total asset turnover is slightly less than 3 for the three years under consideration. But comparison of the three years indicate deteriorating trend with respect to average collection period and inventory turnover ratios. Average collection period increased from 37 days in 1988 to 43 days in 1990. Trade credits used to be paid in 35 days in 1988, but in 46 days in 1990. These indicate inefficiency compared to the net 30 days terms and the cond ...