Butler Lumber Company

Case Analysis

In completing the case, we have consulted only with each other and/or the instructor.

Sergei Chunkovsky

Hung Nguyen

Jeffrey Parrish

January 25, 2016

Butler Lumber Company, a lumber company located in the Pacific Northwest, is rapidly expanding and is seeking to borrow more cash to finance its day-to-day operations. However, their current bank, Suburban National, has imposed a limit on their borrowing thus causing Butler to seek funds from another bank, Northrop National.
Butler Lumber finds itself in a unique position, as it requires an influx of cash even though sales are growing and the company is generating revenue. Because Mr. Butler wants to take advantage of trade discounts, he uses bank notes to pay his suppliers quickly where he would otherwise be unable to with operating cash flows. As his business grows, he purchases more and more inventory on account, requiring larger amounts of debt to pay off. Under current operating procedure, Mr. Butler will need to find another bank to lend him money so that he can continue to operate his business.
Based on current projections, it is estimated that the Butler Lumber Company will need to obtain approximately $215,000 from Northrop National Bank to meet their current obligations. Table 1 shows a detailed pro forma balance sheet for the Butler Lumber Company for the years 1988 through 1991. This $215,000 number is calculated on the assumption that sales for 1991 will be $3.6 million and that management will continue to use the cash obtained via the bank loan to pay suppliers in order to obtain a trade discount. In addition, it is assumed that the balance sheet and income statement items grow proportionately with sales. Table 2 shows that, even though sales increased by approximately 25%, overall net income decreased slightly from 1990 to 1991, dragged down by