Butler Lumber Company Essay Example for Free

butler timber Company EssayI. Statement of Financial ProblemButler Lumber Company is facing the internal risk of not having enough borrowing power to stay put operations as desired. The owner of the conjunction has established a relationship with a new patois to increase their borrowing power, however, base on Butler Lumber Companys past operate Statement and Balance Sheet, the connection is expecting to continue substantial growth without considering external risks that may affect their business. before long the caller requires debt to maintain daily operations and growth. II. General theoretical account for Financial AnalysisA party should maintain full(prenominal)er fluidity ratios that will sustain operating activities and desired growth, as well as al kickoff the participation to pay any short-term 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 in strument purchases.Additionally, a companys store should turn several times per year. As sales argon forecasted a company should increase their inventory to accommodate 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 experienced significant growth over the last few years. Their price has remained competitive compared to similarly available product. The company expects to continue growing at this level and to do so, requires the availableness of credit from their bank to maintain current and increased inventory levels and to cover 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 bebased on their forecasted monthly sales. In 1990 their inventory was turning 4.67 times per year, or every 2.5 months. While continued growth may make this tonus necessary, the company has failed to consider external risk factors that could affect their business drastically. While theyre sales are driven by not only new home construction, but home repairs as well, in the event of an economic crisis home repairs would likely decrease. As a result, Butler Lumber Company would select 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 inefficient to use that cash to pay their outstanding payables with discounts or cover their operating costs without incurring debt.Finally, the companys liquidity ratios support 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 ve ry low year after year. Their cash on hand would not cover their short-term liabilities.IV. Assumptions and Special/Mitigating portionNo assumptions were made in this analysis. The companys financial statements clearly state their condition. Recommendations are based on that information.V. Conclusions and RecommendationsButler Lumber Company should monitor 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 assist with collect within the terms of payment outlined in customer agreements.