Gilbert Lumber Company

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External Funding Needs & Sustainable Growth Rate

Gilbert Lumber requires $147,000 (Exhibit 1) in external funding for 2014 assuming the company grows to $3.6MM in sales (33.6% growth) as per the bank analyst; however, to sustain their growth without further external funds Gilbert Lumber can grow at 17.8%.

EFN Sensitivity Scenario

During each of reported years, Gilbert has raised his salary by $10K. It is therefore safe to assume that he will do the same in 2014. However, by lowering his forecasted 2014 annual salary of $105K by 30% GLC will decrease its external financing needs by almost 18% to $121,000. Moreover, the company's sustainable growth rate will increase from 18% to 24% (Exhibit 2). Considering that Khai National bank could impose salary restrictions on Palmer Gilbert should he accept their Line of Credit, a salary reduction may be required regardless.

Inventory Management

There are 2 options available to GLC, based on its current balance sheet.

- GLC could take out an inventory loan on its existing inventory of $556K. It is typically possible to obtain loans equal to 50-75% of inventory on hand, which would increase GLC’s liquidity between $278K and $417K.

- Or, GLC could take out a receivables loan on its existing receivables of $345K. This financing method would result in additional liquidity of $172.5K and $258.75K, assuming the standard of 50-75% of receivables is available.

GLC should modify its credit policies, to reduce its receivables collection period down from 36 days. GLC currently offers a discount to its customers, as they buy in bulk. It could add a penalty fee to customers who pay after 30 days from the purchase date in order to encourage customers to pay faster, while still allowing it to maintain good customer relationships for those who can pay on time. It is more difficult to predict how many customers would be encouraged to pay faster. For example, if GLC implements a penalty fee of 6% on overdue payments, perhaps 60% of customers would be inclined to pay on time. This would allow GLC to reduce its EFN by $10.35K. A lower penalty fee may incline fewer customers to pay on time; a 2% penalty fee may only induce 40% of customers to pay on time, reducing GLC’s EFN by $4.1K.

Price Leadership

As Gilbert Lumber Company has achieved its strong growth somewhat due to their price competitiveness, it would also suggest that if the rate of growth exceeds sustainability, there may be room for a price increase to ease the growth and improve profitability.

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Exhibits:

1. EFN Graph:

[pic 1]

[pic 2]

2. Scenarios analysis: impact of salary decrease on EFN

% Reduction of salary

100%

80%

70%

Salary (in $1000)

$105

84

73.5

EFN

$147

$129

$121

Change EFN

$0

$18

$26

3. Financial Ratios

[pic 3]

4. Income Statement

[pic 4]

5. Balance Sheet

[pic 5]

6. EBIT vs Sales Growth

[pic 6]

7. Sources and Uses of Cash

[pic 7]

8. Operating and Cash Cycles

[pic 8]

9. Credit Policy Modifications

% of customers using discount

40% 45% 50%

Option 1 - penalty fee of 2%

$4.1

$3.8

$3.5

Option 2 - penalty fee of 4%

$8.3

$7.6

$6.9

Option 3 - penalty fee of 6%

$12.4

$11.4

$10.4

10. Ferryn National Bank effective interest rate

Interest Expenses on Short and Long term Debts

YEAR

LT debt

Notes

Note APR

2011

0

13,000

2012

7,411

12,589

8.62%

2013

6,641

26,359

11.31%

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