Essay on Cartwright Lumber Company case
808 WordsOct 16th, 20134 Pages
ID #: 502
Name of the business: Cartwright Lumber Company
Nature of the business: Retail distribution of lumber products
Overview The Cartwright Lumber Company had been found in 1994 as a partnership by Mark Cartwright and his brother-in-law Henry Stark. Later in 2001, Mr. Cartwright bought out Stark’s shares and incorporated the business. Now, Mr. Cartwright is a sole owner and president of the company. The business is located in the Pacific Northwest region and does the retail distribution of lumber products in the local area. Plywood, moldings, and sash and door are some of the typical products of the company. In recent years, the company experienced a rapid growth and expects a substantial increase in sales in the spring of…show more content…
Operations Analysis Cartwright is a retail distributor of lumber products. It built its competitive edge based on pricing and having a careful control over its operations. The company reported an operating income of $86,000 and $111,000 in 2003 and 2004, respectively. This is a 29% increase in operating income in one year, which shows the firm’s strong ability to generate cash. The firm’s account receivables and inventory are increasing from year to year which is a good sign of a growing business. Cartwright is not an asset intensive company. It does not have to have huge fixed assets; most of its assets are cash, accounts receivable and inventory which all depend on future sales. Sourcing of materials is managed very well, purchased at discounts most of the time and contribute to having lower prices.
The company’s day-to-day operations did not change significantly over the last few years. Average collection period, inventory turnover, accounts payable, accounts receivable as well as cash conversion cycle all went up and down over the last four years but mainly stayed in the same range. So, there is no any significant change in operations. Mr. Cartwright has a very sound control over operations of the firm. Therefore, I believe, the company needs few more years to recover from the debts
We will start by assessing one of the two immediately available options presented for Butler Lumber: Butler Lumber can remain with Suburban National Bank by accepting their loan offer of $250,000. The only apparent advantage of this option lies solely in the fact that the relationship with the bank already exists. The disadvantages are seen in the possibility that Butler Lumber will need additional financing past the initial loan amount,
and the offered loan is now secured (backed by Mr. Butler’s real property), signaling that
the bank has doubts that Butler Lumber will pay back the loan amount. Though Butler may be capable of repaying the amount, it is inevitable that the company will need more financing.
Due to the bank’s recent focus on the riskiness of Butler Lumber, this may alter
their ability to receive more funding from Suburban National Bank. Mr. Butler could alternatively choose to take the unsecured revolving 90-day note of $465,000 at 10.5% interest from Northrop National Bank. The apparent advantages are: it is a more flexible option, it is an unsecured loan that requires no collateral from Mr. Butler, and it is of a larger amount. The big disadvantages are: the termination of the banking relationship between Butler Lumber and Suburban National Bank, and the increased interest expense on the loan. Another disadvantage of establishing a LOC with Northrop National Bank is the possibility of restrictions on the company stating that the net working capital be maintained at a level agreed upon by both parties and any increase in fixed assets with approval by Northrop. Also there would be limitations on withdrawals of funds from the business by Mr. Butler. Another concern with the loan is that Butler Lumber would need to draw additional loans from Northrop because the company is unable to pay back the loan amount within the 90 day period due to the lack of cash and liquid assets.
-Why does Butler Lumber have a cash shortage problem to begin with ,and are they currently using their existing funds efficiently?
The “Sources and Uses of Funds brings forth a snapshot of the company’s cash flows and illustrates the reason
nd Butler Lumber’s cash deficit. For the past
two years, Butler Lumber has generated negative cash flow from operations, which is alarming for the firm. Given the typical business model of a growing firm, Butler Lumber has seen increases in both the inventory and receivable accounts. This makes sense because the more customers Mr. Butler has, the more inventory he needs to have on hand and given his somewhat lackadaisical approach on payment collection, the amount of receivables is expected as well. This could be an issue for the firm, but if Mr. Butler has a strategy to fund operations until they are able to generate more cash, it will not break the firm. As inventory and receivables grow, an area to hone in on is whether or not these accounts are being turned over in a timely, progressive manner.
As seen in the “Asset Utilization Analysis” table,
the ratios for both receivable and inventory indicate that it is taking a longer period of time to collect money and a is holding on to inventory for much longer (nearly 15% and 10% longer, respectively). It is clear that Butler Lumber is not maximizing operational efficiency and will accrue extra costs as a result.
-How much additional funding does Butler Lumber need, and will the firm continue to need even more in the future?
After analyzing and projecting Butler
Lumber’s 1991 Pro Forma Balance Sheet, we have decided to separate the projections
when considering the current payable policy and also considering discounts. We have concluded that Butler Lumber will need additional funding of $409,000 under the current payables policy, and including purchase discounts, they will need $658,000 (seen in Exhibit 1). These figures indicate exactly how Mr. Butler has been operating, relying on specific