Bulter Lumber Case Essay

2813 Words Mar 27th, 2016 12 Pages
Butler Lumber Company

Case Analysis

In completing the case, we have consulted only with each other and/or the instructor.

Sergei Chunkovsky

Hung Nguyen

Jeffrey Parrish

January 25, 2016

Butler Lumber Company, a lumber company located in the Pacific Northwest, is rapidly expanding and is seeking to borrow more cash to finance its day-to-day operations. However, their current bank, Suburban National, has imposed a limit on their borrowing thus causing Butler to seek funds from another bank, Northrop National.
Butler Lumber finds itself in a unique position, as it requires an influx of cash even though sales are growing and the company is generating revenue. Because Mr. Butler wants to take advantage of trade discounts,
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However, these numbers rely on several assumptions that, if wrong, could dramatically change the size of the loan needed from Northrop National. For example, Butler Lumber could decide to not pay their suppliers within 10 days and thus lose out on whatever discounts are offered. This would lower the amount of cash they would need to borrow from the bank, as they might be able to pay their suppliers with cash generated from operating activities. However, it’s noted that sales volume had been built up largely on the basis of successful price competition, made possible by careful control of operating expenses and, particularly, by quantity purchases of materials at substantial discounts. There is also the possibility that sales will not meet the $3.6 million estimate, which would dramatically affect the amount of cash needed from the bank. As shown in table 3, if sales are $300,000 lower than projected, the size of the loan needed from Northrop is only $140,000. This is quite interesting. Looking at the cash flow situation in table 4, one can see that normal business operations do not generate cash, rather almost all cash is created from financing. In fact, operating cash flow is actually decreasing from previous years. Overall, Butler Lumber’s growth seems to be artificial and this may be unsustainable in the long run.
There are additional ways for the estimated size of

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