Butler Lumber Case Study

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Although the company's current ratio and quick ratio (the measures of a company’s ability to pay its short term debts) have declined in the past few years from (Appendix, Figure 5), it is due to the increased utilization of current debt to handle increased purchasing and a projected increase in sales - not necessarily due to poor management. The bank will most likely approve this loan, with the conditions that Butler reduce its CCC and Accounts Payable Collection Period. In the unlikely event the company would be required to shut down, the bank would still retain ownership of the materials purchased by the company and could then sell that material to recoup the value of the loan. In addition, with the positive reviews from the company’s business partners, the potential for increased growth and Mr. Butler’s relatively young age there is little reason to think the business won’t continue to be a going concern.

We recommend Mr. Butler continue with his planned expansion if it includes additional debt financing so that he may utilize additional cash to grow his business at a sustainable growth rate. Being cash-poor is a short-term problem that can be resolved so long as the current growth continues. To mitigate the cash conversion issue, we advise Mr. Butler to offer some incentives to customers to pay cash or avoid financing their purchase through credit. If you have any further questions or concerns about our findings or recommendations please feel free to contact us and we would be happy to discuss this issue further.

Sincerely,

Kathleen Esses, Kyle Hirn, Lauren Stevens, and Tayt Held

Appendix

Figure 1

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Figure 2

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Figure 3

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Figure 4

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Figure 5

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Figure 6

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