Clarkson Lumber Case Essay

Clarkson Lumber Company is a classic example of a in private held follow that has experienced a fast developing in gross revenue and has fixed a point where it is facing a famine of cash to sustain the expected growth in sales in the succeeding(a) socio-economic classs. The owner, Keith Clarkson, bought out his partners lodge in in the corporation in 1994 for $200,000. His partner, total heat Holtz, took a note for the $200,000 with an interest value of 11% and was re yield qualified in the semi-annual installments of $50,000 blood dividing melodic telegraph wire June 30, 1995.The note was taken to give Mr.Clarkson succession to arrange for the necessary financing. Mr. Clarkson seems to be speed the lodge well, evident by the never-ending growth in sales year after year. However, the corporation is running emit on cash on hand, and need whatever form of financing to reach the expected sales of 5. 5 meg in 1996. Moreover, the borrow limit align by the Suburban swear has been reached, actuate the bank to ask Mr. Clarkson to guarantee the add personally. Mr. Clarkson has been in communication with another bank, Northrup bound, which top executive be willing to extend a line of reference work of up to $750,000. psychoanalysis There atomic number 18 several reasons for Mr. Clarksons need to rely on borrowing despite good gets. Although the earns are good, they are not good generous in our view. The Net Profit strand has been close to 2% since 1993 (Exhibit D). The cost of goods congress to the sales is high and is retentiveness the profit margin low. In other words, the be have increased at a faster rate than sales. The Cost of Goods sell is consistently around 75% of sales. Secondly, the take on Assets is roughly 5% in 1995 (Exhibit D). This ratio is kept low collectible to a high total assets figure. lend assets are also inflated re chip inable to the liabilities taken in the form of raft acknowledgments by Mr. Clarkson The company is keeping a high volume of stocktaking in stock as shown by its Inventory Turnover ratio modal(a) of 6%. The median(a) Collection bound has jumped from 38 old age to 48 days since 1993 (Exhibit B). Thus, the limited amount of cash influx is largely tied in stock, and payments on loans. Mr. Clarkson has been unable to take full emolument of the trade discounts (2% if paid with in 10 days) during the last two years callable to a shortage of funds arising from his barter for of Mr.Holtzs (his partner) interest in the military control and the redundant investments in working crownwork associated with the companys increasing sales volume (Case, Pg 2). And even though Mr. Clarkson has been able to use the attribute from Suburban Bank of up to $400,000 to finance the increase in sales, the ceiling has also forced the company to use cash to fund itself and pay off loans. The current and quick ratios both support this fact (see Exhibit D). base on the pro forma shee ts there is an additional $251,000 needed to attain the goal of $5. 5 million in sales.Also, since part of the symmetricalness is to break off from Suburban case Bank, the line of credit has to cover the 399,000 cover by the loan. With about $650,000 line of credit used, the remaining $100,000 of the new loan could be used to pay off Mr. Holtz and change Mr. Clarkson to take advantage of the trade discounts by paying his suppliers back in 10 days thus achieving the sales tush with lower cost. Recommendations We recommend Mr. Clarkson to seriously dish out taking the new line of credit. The line of credit will enable the company to take advantage of the trade discounts and pay off previous debt.Lowering the cost should be a high precession and it might be worth plot of land to consider holding less inventory (if it does not affect the service and part clients expect). Mr. Clarkson should identify and prioritize the high profit margin products/services the company offers and concentrate on those. The company would also do well to try to reduce the Average Collection Period to with in 30 days. As far as Northrup Bank is concerned, we recommend that the bank extend the line of credit but makes sure that the company does not reach the ceiling again.A high proportion of the credit line would be used in the blood line but that is due to the line of credit covering the previous loan, Mr. Holtz interest and some immediate financing for inventory purchases. In the foreseeable future though, once the company sheds the loans it carried and get more streamlined, it will come to the fore increasing its cash gradually. Mr. Clarksons dividing line references are excellent and the company has ever so paid its bills on time. Therefore, the company is not a risk and the line of credit should be approved.