Case Study

Butler Lumber Company

                                                                                                          All amounts are in ‘000s

1. Comment on the performance of M/s Butler Lumber company

           LIQUIDITY RATIO

The quick ratio of the company in the year 1988 is 1.5 as compared to the year 1989
having 1.2 quick ratios and the ratio of in 1989 and 1990 is equal to 1.2.

EFFICIENCY

The efficiency ratios for the 3 years showing acceptable results.

PROFITABILITY

The operating margin is 3% in all 3 years.

The net profit is too low at 3% which is concerning. The solution lies in increasing
revenue.

2. Cite reasons why the company had to borrow more and more.

The revenue generated was not enough to pay off the debts in hand as a result of
which the company had to borrow year on year. 

The sales for figures 1988, 1989, 1990 were:

Sales -                   $ 1697    $ 2013     $2694

As the borrowings increased the interest amount to be paid also grew.

3. Identify the accounts head where cash has been consumed during the 1988-1990
period. Mention the amounts involved for each of these accounts head.

                                 1988       1989          1990

Account’s payables     $253         $268          $528

4. Identify the accounts head where cash has been generated from during the
1988-1990 period. Mention the amounts involved for each of these accounts head.
                               1988    1989     1990
Sales -                    1697     2013     2694
Borrowings -            324       432       585
5. Taking cash discounts better than delaying payments to creditors?
True. Delaying cash payments to creditors would lead to payment of more interest.

6. What is the SFG rate that the company has?

 Will it be enough for sustaining the predicted growth?
 Should the bank approve of the company request for additional finance?
 As a financial advisor to Mr. Butler, what measures would you suggest

1- Finding the revenue per day:

Net revenue/ 365

1988: 1697/365= 4.65

1989: 2013/ 365= 5.52

1990: 2694/365= 7.38

2- How many days’ worth of sales is receivable?

= Total debtors/ Revenue per day

1988- 171/4.65= 36.77 days

1989-222/5.52=40.21 days

1990-317/7.38=42.95 days

3- Find inventory in terms of days.

a) COGS per day=COGS/365

1988-1222/365=3.34

1989-1437/365=3.93

1990- 1950/365=5.34

b) Day’s inventory= Total Inventory/ 365

1988-239/3.35=71.34

1989-326/3.94= 82.74

1990- 418/5.34= 78.27

4- Accounts payable

1988-3.34/124=37.04

1989-3.93/192=48.77
1990- 5.34/256=47.92

 Will it be enough for sustaining the predicted growth?

Yes, the company can sustain. The company has to check its huge inventory at a
given point of time.

 As a financial advisor to Mr. Butler, what measures would you suggest

Butler should not go for further loan as the interest rate is going to be huge. He should limit
his expenses and make changes in his model to also increase the revenue.