Butler Lumber Company Essay

I. Statement of Financial ProblemButler baseball bat come with is facing the internal risk of not having enough borrowing supply to continue ope dimensionns as desired. The owner of the association has established a relationship with a new bank to increase their borrowing power, however, establish on Butler Lumber Companys past operate Statement and Balance Sheet, the fraternity is expecting to continue substantial growth without considering international risks that may affect their business. Currently the company requires debt to introduce daily operations and growth.II. General Framework for Financial AnalysisA company should admit higher liquidity ratios that will sustain operating activities and desired growth, as well as allow the company to pay any short-run debt obligations. One way to maintain higher liquidity ratios is to collect on receivables timely, and use cash obtained to take advantage of discounts offered on account purchases.Additionally, a companys invent ory should turn several times per year. As sales are forecasted a company should increase their inventory to fit forecasted sales on a monthly basis, but keep as little as possible on hand. Ideally, inventory would turn 10-12 times per year.III. Application of the Financial FrameworkButler Lumber Company has see significant growth over the last few years. Their pricing has remained war-ridden compared to similarly available product. The company expects to continue growing at this take aim and to do so, requires the availability of credit from their bank to maintain current and increase inventory levels and to cover version operating expenses.Butler Lumber Company maintains a high level of inventory. Essentially, the company is leveraging their credit and using that to maintain their high inventory levels. As the company grows, their inventory purchases should be base on their forecasted monthly sales. In 1990 their inventory was turning 4.67 times per year, or every 2.5 months . spot continued growth may make this yield necessary, the company has failed to consider external risk factors that could affect their business drastically. While theyre sales are driven by not but new home construction, but home repairs as well, in the final result of an economic crisis home repairs would likely decrease. As a result, Butler Lumber Company would ware a substantial amount of wasted inventory on hand.Butler Lumber Companys sales have increased, however so have their receivables. With receivables sitting uncollected for 42 days, the company is unable to use that cash to pay their outstanding payables with discounts or cover their operating costs without incurring debt.Finally, the companys liquidity ratios bridge over their need for better cash management. Their current ratio suggest the company is solvent and would be able to cover their short-term liabilities if needed. However, the quick ratio for the company is very low year after year. Their cash on hand would not cover their short-term liabilities.IV. Assumptions and Special/Mitigating CircumstancesNo assumptions were made in this analysis. The companys financial conjurements clearly state their condition. Recommendations are based on that information.V. Conclusions and RecommendationsButler Lumber Company should manage their inventory levels closely and maintain only the inventory required to get them through 1 to 1.5 months of sales. They should also employ an aggressive collections team to countenance with collecting within the terms of payment outlined in guest agreements.