Clarkson Lumber Essay examples
Clarkson Lumber Company has been in growth during recent years and anticipated a further increase in sales. Despite of consistent profits, the company has suffered shortage of cash and borrowed fund needed for its business growth.
Increasing amount of borrowing despite of its consistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 60% from 1993-1995, the assets that support increase of sales increased by 78% (Exhibit 1 & 2). The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995 (Exhibit 2). The gross profit …show more content…
If the company takes the trade discounts, the company can reduce the amount of cost of goods sold and reduce the portion of current liability for account payable. In 1995, net sales was$4,519,000.Purchases was $3,579,000. Trade discount is2% of purchases that is $71,580. Earnings are$155,000 before interests and taxes. By using trade discount can almost increase earnings before interests and taxes 50%. In the spring of 1996 the balance was $399,000. The maximum loan that County National would make to any one borrower was $400,000. In the first quarter of 1996, the purchase was $819,000. It will be insufficient to take the advantage of the full trade discount. However, it leads the increase of income tax. Also, In order to take full trade discount, the company needs to increase the amount of bank loan, the cost of the interest may cause the deterioration of the financial health of the company. The usage of the lend credit would be beneficial to the Clarkson Lumber Company as long as it increases the profitability.
If I were Mr. Clarkson, I don’t agree the following two loan requirements. First, 90-day note period is too short. About 55% of total sales were made from April through September. During some periods the financial status seems strong but other period shows the deterioration,