Butler Lumber Company Case Problem

1. How well is Butler Lumber doing?

Looking at the sales and asset growth, the company is able to gain more in terms of sales
especially since the company is run with few employees.By hedging the inventories level, Butler
Lumber will be able to enjoy a protection of its profit margin.
However, Despite recording a tremendous growth in revenue as follows:
2009: 18.62%
2010: 33.83%
2011: 6.61% (on annualised basis)

The profitability of Butler Lumber is on declining trend.

| |2008 |2009 |2010 |1Q 2011 |
|Gross Profit Margin |27.99% |28.61% |27.62% |27.30% |
|Net Income Before Taxes Margin |2.18% |2.04% |1.97% |1.53% |
|Net Income Margin |1.83% |1.69% |1.63% |1.25%

2. What has been the company’s financial strategy? Why does Mr. Butler have to borrow so
much money to support seemingly profitable business? Has he been managing his company’s
cash flow wisely?
Butler Lumber Company has increasing return on equity along with increasing return on
invested capital, also, they should consider to establish long-term relationship between the bank
and the company, through this, the bank will be able to capitalize on Butler Lumber’s growth and
cross sell the services to Butler Lumber Company.
The company is experiences cash shortage, increasing cash receivable period, decreasing
day’s cash, need to pay loan and interest repayment. The company’sgoal is to eliminate the trade
debt, while maintaining the current bank note at $247,000, Mr. Butler would need an additional
$124,000, the remaining balance after deducting $33,000 from the trade credit of $157,000. But
the bank will not offer this additional funding resulting in the discussion with Northrup.
Taking into account on its profitability, the company has escalate ROE together with its
efficiency at allocating the capital under its control to profitable investment. Credit term also
enable the business to increase its days payables, also management of its inventory as
proportionate on sales indicates better management of inventory. In terms of liquidity, both
Butler’s current and quick ratios along with time interest earned have been decreasing over the
years, however, the numbers still indicates good ability to pay off debt in case of liquidation and
still remains in good condition.

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3. Do you agree with Mr. Butler’s estimate that he will need up to $465,000 in 2011? How
much will he need to borrow to finance his expected expansion in sales in 2011 (assume sales
volume hits $3.6 million

Pro Forma Income Statement

Balance Sheets at December 31, 2008 - 2010,

and March 31, 2011 (thousands of
dollars)

1st Qtr. Year End

2008 2009 2010 2011 2011
Net Sales $1,697 $2,013 $2,694 $718 3,600
Cost of goods
sold
Beginning
inventory 183 239 326 418 418
Purchases 1,278 1,524 2,042 660 2,736
$1,461 $1,763 $2,368 $1,078 $3,154
Ending Inventory 239 326 418 556 562
Total cost of goods
sold $1,222 $1,437 $1,950 $522 $2,592

GROSS PROFIT 475 576 744 196 1,008

Operating expense
(b) 425 515 658 175 900
Interest expense 13 20 33 10 75
Net Income before
tax $37 $41 $53 $11 97
Provision for
income tax 6 7 9 2 21
Net Income $31 $34 $44 $9 $76

4. How much will Mr. Butler need over the next few years if sales grow at 25% per year?
Mr. Butler would need around $350,000 if his sales were to grow 25% per year.

5. Would you recommend that Mr. Butler proceeds with his expansion plans?
Mr. Butler should consider alternatives:
a. More efficient inventory management system
b. Faster collection on Accounts Receivable
c. Significant reduce Accounts Payables
d. Cut in Mr. butler’s annual salary and perquisite consumption