...Financial Management – 514 Clarkson Lumber Case Study – 1 Clarkson Lumber, founded in 1981 as a partnership, is a rapidly growing business. The company has relatively low operating expenses and is a fairly profitable outfit. At first look, Clarkson appears to be a well-managed, growing, profitable company. When we dig a little deeper, issues relating to liquidity and financing arise and bring into question the ability for Clarkson to sustain growth. In terms of profitability, Clarkson is fairly consistent over the years. Please see below table for calculations: | 1993 | 1994 | 1995 | Q1 1996 | Gross Margin | 25% | 24% | 24% | 25% | Operating Margin | 3% | 4% | 3% | 2% | Net Profit Margin | 2% | 2% | 2% | 0% | The gross margin indicates that Clarkson is selling its products for more than the direct costs of making the product. The consistent gross margin shows that Clarkson most likely is able to maintain the cost of its inventory through long term contracts. Clarkson is maintaining a consistent operating margin, and the company’s operating expenses average 21% in sales 1993-1995 with a slight increase to 22.9% in Q1 1996. Other than Q1 1996, Clarkson’s operating expenses as a percentage of sales are in line with other high-profit lumber outlets. Regarding net profit margin, Clarkson is at 2% in 1993-1995, with a decrease to 0% in Q1 1996. The reason for a low net profit margin and lower operating margin in Q1 1996 is due seasonality. A large...
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...Statement of the Problem At first glance, Clarkson Lumber appears to be a healthy company. However, despite rapid growth and increasing sales Clarkson Lumber finds itself searching for additional funding to compensate for a shortage in cash to fund its expanding business. Clarkson Lumber is in this situation for a number of reasons. The company's inability to receive payments from customers in a timely manner created a severe impact in the company's cash flows. The age of account receivables increased each year. In 1995 it took 49 days on average to receive payments from customers. Because of the delay in accounts receivable, Clarkson Lumber's ability to pay suppliers on time is also impacted. In 1995 it took Clarkson 38 days on average to pay its suppliers. Additionally Clarkson Lumber continues to retain increasing amounts of inventory. Inventory as a percent of sales is projected to be 13.5% which lies substantially above industry standards of 12% for low profit outlets and 11.6% for high profit outlets. As a result the company is forced to borrow increasing amounts of debt to reach its anticipated sales of $5.5M in 2006. Reasons for borrowing: • Receivables is a problem, DSO is being stretched by customers so cash inflow goes down • Account payables cannot be cleared as money is stuck in receivables • Inventory conversion period appears to be a factor as well because increasing amounts of inventory is being retained • Interest being charged has increased...
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...Clarkson Lumber Company 1. Clarkson Lumber Company was founded in 1981 and is owned by Keith Clarkson. The company is a retail distributor of lumber products in the growing suburb of the Pacific Northwest. Through competitive pricing and limiting operation expenses, the company has experienced consistent growth and anticipates substantial increases in sales in the coming years. Sales fluctuate to some degree with the health of new housing construction but the company’s high percentage of sales in the repair business have protected the company from economic downturns. Despite the health of the company, Mr. Clarkson is seeking to increase the company’s borrowing. Clarkson Lumber Company is experiencing a shortage of cash as a result of an increase in accounts and notes payable over the last two years. In 1994, Mr. Clarkson bought out his partner, Henry Holtz, for a $200,000 note. The note was to be paid off in 1995 and 1996 and it carried an interest of 11% that consisted of semi-annual payments of $50,000 beginning June 30, 1995. Additionally, Mr. Clarkson was unable to capitalize on purchase discounts of 2%, if the payments were made within 10 days, but luckily suppliers did not seem to mind if payments lagged beyond the 30 day agreement. The buyout of Mr. Holtz and the increase in working capital from expanded sales limited his ability to take purchase discounts and increased his accounts and notes payable. As we can observe from the company’s balance sheet, the total...
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...Clarkson Lumber Case Analysis Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? 1. Cost of Goods Sold: Even though profits have been consistent, they have not increased sufficiently. The NPM has remained close to 2%, and COGS has remained around 75%, keeping profit margins low (See Appendix Exhibit 3). Therefore, operating expenses and COGS have increased at a quicker rate than net income. Additional funds are required to not only maintain the company’s current growth rate with expected sales of 5.5 million, but also to increase purchasing power for goods. 2. Use of Cash: In addition, Mr. Clarkson bought out his partner, Mr. Holtz, for $200,000 in 1994. Mr. Holtz took a note for $200,000 to be paid off in 1995 and 1996 with interest rate of 11%, repaid in two semi-annual installments of $50,000 beginning June 30, 1995. The terms of this note are not conducive to the current cash cycle of Clarkson Lumber. He is required to pay the note in too short of time in comparison to his revenue. Mr. Clarkson also used his cash to invest in working capital (see #3) associated with the company’s increasing sales volume. This prohibited him from taking advantage of the trade discounts, which would have decreased cost of sales. 3. Asset Purchases: Clarkson Lumber had made a significant asset purchase in 1995, totaling $126,000. This could have been for the purchase of additional property to support the continued sales growth, however due to the small...
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...Clarkson Lumber Company Case : Assignment, Due October 4 1. In your group, assign a Team Administrator, a Notekeeper, and a Number Cruncher(s). These do not need to be independent roles (the Team Spokesperson may be the Number Cruncher, etc.). The other members of the group will contribute their thoughts and ensure that their spokesperson has all the relevant facts to speak for their group. a. The Team Administrator keeps the group on track to ensure that the discussion is on topic without venturing out of scope for this case. The key here is to develop an attractive solution in a relatively short period of time. b. The Notekeeper is capturing the group’s thoughts on paper to be used to develop a cohesive solution. This is very important so that no essential components of dialogue are lost during brainstorming. c. The Number Cruncher(s) will work through financials based on the proposed short-term financing. The financial results produced by this individual(s) will play a predominant role in determining the group’s proposal. You should use your best judgment for projections. 2. The case should be approached in a stand-alone fashion. There is no need to go looking for supporting data. You may make assumptions as appropriate. 3. You will need to: Be prepared to present any portion of the case orally (no need for slides) For the written report, follow this guideline but be sure to organize the report in story...
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...Executive Summary Clarkson Lumber is a small but rapidly growing lumber company in the Pacific Northwest. Keith Clarkson--sole owner and president--anticipates further sales growth but his business may not be able to keep up with future demand because of a shortage of cash, despite good profits. Currently the company has a line of credit with Suburban National Bank, but the bank would not offer any one customer any more than a $400,000 loan, a limit which Clarkson is bumping up against at $399,000 outstanding in the spring of 1996. Staying within the limits requires Clarkson to rely very heavily on trade credits and now Suburban is asking Keith Clarkson to personally guarantee the loan, which puts more risk on him, should the lumber company become insolvent. Therefore, Mr. Clarkson is looking to find another bank with higher lending limits and no personal guarantees to do business with. The task for George Dodge, officer of the larger Northrup National Bank, who is interested in having Clarkson as a client is to investigate Keith Clarkson and his company and determine whether to extend a $750,000 line of credit. Secondary to that is whether $750,000 will be enough to finance the expected expansions, along with the question of what conditions the loan should come with. Our response to whether Clarkson should get the loan is yes, Northrup should approve of Mr. Clarkson’s request for a higher credit line. We also think that $750,000 is a good estimate of the company’s loan...
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...Clarkson Lumber Company Case Assignment : Due Oct 3 1. In your group, assign a Team Administrator, a Notekeeper, and a Number Cruncher(s). These do not need to be independent roles (the Team Spokesperson may be the Number Cruncher, etc.). The other members of the group will contribute their thoughts and ensure that their spokesperson has all the relevant facts to speak for their group. a. The Team Administrator keeps the group on track to ensure that the discussion is on topic without venturing out of scope for this case. The key here is to develop an attractive solution in a relatively short period of time. b. The Notekeeper is capturing the group’s thoughts on paper to be used to develop a cohesive solution. This is very important so that no essential components of dialogue are lost during brainstorming. c. The Number Cruncher(s) will work through financials based on the proposed short-term financing. The financial results produced by this individual(s) will play a predominant role in determining the group’s proposal. You should use your best judgment for projections. 2. The case should be approached in a stand-alone fashion. There is no need to go looking for supporting data. You may make assumptions as appropriate. 3. You will need to: Be prepared to present any portion of the case orally (no need for slides) For the written report, follow this guideline but be sure to organize the report in story format...
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...Clarkson Lumber Hardwoods, Hard Times BBUS 505a Cavelero, Engstrom, Tobey & Zadah Overview • Case Summary • Problem Identification • Findings • Methodology • Metrics • Insights Case Summary • Clarkson Lumber Company [‘CLC’], is a small PNW lumber concern experiencing rapid, questionably financed growth. • Keith Clarkson [‘Clarkson’], sole owner of CLC, has maxed out ($399K of $400K) his line of credit [‘LOC’] at Suburban National. • CLC relies heavily on trade credit and short term debt. • Clarkson wants to move to Northrup National Bank – a larger bank – with a a $750K short-term LOC. • George Dodge, Northrup officer, is cautiously receptive. He’s asked a team of intelligent, attractive analysts to investigate the current state of CLC. Problem Identification “Clarkson wants to move to Northrup National Bank – a larger bank offering a $750K LOC.” • CLC overuses expensive short-term debt to finance growth and buyout his former partner. • It is our opinion that receiving a larger LOC from our bank will result in negative future growth and exacerbate current cash flow problems. • There are other problems with cash-flow, including inventory purchasing, A/R and a 2% A/P discount (opportunity). • PPE depreciation is an unkown; for our analysis, we factored it out. Findings • CLC can be a profitable investment for Northrup, but not with the stated credit terms. Debt restructuring is needed to maximize CLC’s profitability. • According to our research, CLC is in...
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...Finance 725 Spring 2006 J. E. Hodder Corporation Finance Course Schedule Tuesday, January 17: Introduction Thursday, January 19: Clarkson Lumber Company Reading: Note on Financial Analysis a. How is the company's financial performance? (Examine appropriate financial ratios.) b. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? c. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated? d. How attractive is it to take trade discounts? Tuesday, January 24: Clarkson Lumber Company (continued) Reading: a. Note on Financial Forecasting b. Note on Bank Loans a. How much of a loan will Mr. Clarkson need to finance the expected expansion in sales to $5.5 million in 1996 and to take all the trade discounts? (Prepare a projected income statement for 1996 and a pro forma balance sheet as of December 31, 1996.) b. As Mr. Clarkson’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and plans for additional debt financing? c. As the banker, would you approve Mr. Clarkson’s loan request; and if so, what conditions would you put on the loan? Thursday, January 26: SureCut Shears, Inc. ...
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...Financial Analysis and forcasting Monica fernandes som 101 November 9, 2004 Prof. Pierre du jardin Mr. George Dodge, Clarkson Lumber Company is doing well but there is the issue of whether or not there is too high a risk in granting the request for the $750,000 line of credit. There are many supporting strong points but it also has some problems to work out. This is a company that has many good characteristics and looks promising but needs the extra money to pay off loans, inventory, and supplies. I recommend this company to receive the line of credit. Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands. Current ratio and quick ratio are really low and have been decreasing. For 1995, the current ratio is 1.15:1, which is less than the industry average of 1.60:1, however to give a better sense of where this stands in the industry, as seen in exhibit 3, it is actually less than the average of the bottom 25% of the industry. The quick ratio is 0.61 is less than the industry is 0.90. Both these ratios serve to point out the lack of cash in this company. The cash flow has been decreasing because, it takes longer to get the money from customers, but the company still needs to pay for its purchases. Also, the company couldn’t go over the $400,000 loan limit, so they were forced to stretch their cash. Return on sales is decreasing and is below the industry average, but...
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...Clarkson Lumber company Financial Analysis and forcasting Mr. George Dodge, Clarkson Lumber Company is doing well but there is the issue of whether or not there is too high a risk in granting the request for the $750,000 line of credit. There are many supporting strong points but it also has some problems to work out. This is a company that has many good characteristics and looks promising but needs the extra money to pay off loans, inventory, and supplies. I recommend this company to receive the line of credit. Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands. Current ratio and quick ratio are really low and have been decreasing. For 1995, the current ratio is 1.15:1, which is less than the industry average of 1.60:1, however to give a better sense of where this stands in the industry, as seen in exhibit 3, it is actually less than the average of the bottom 25% of the industry. The quick ratio is 0.61 is less than the industry is 0.90. Both these ratios serve to point out the lack of cash in this company. The cash flow has been decreasing because, it takes longer to get the money from customers, but the company still needs to pay for its purchases. Also, the company couldn’t go over the $400,000 loan limit, so they were forced to stretch their cash. Return on sales is decreasing and is below the industry average, but the goods news is that sales and profits have been...
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...COMM 371, Lecture 6 COMM 371, Lecture 6 Lecture 6: Financing Growth – The Clarkson Lumber Case Outline for Today (Clarkson Lumber) • Case objectives • Understand what drives the need for cash: Clarkson needs cash, but has a good record of profitability • Evaluate Clarkson’s loan requirements and ability to repay • Link the short-term financial plan to evaluating the firm’s long-term goals • Practice basic skills in financial analysis • Review facts of case • Construct statement of cash flows • A closer examination of working capital • Analysis of fixed assets • What factors contribute to a need for cash? • Evaluating the “financial strength” of Clarkson • Clarkson’s sustainable growth rate • How much does Clarkson pay for AP financing? • Evaluate Clarkson’s need for bank financing and ability to repay • Long-term strategy Case Facts • Rapid growth in business during recent years (1993-1995). Sales expected to reach $5.5 million in 1996 (+22% vs. previous year) • Profits in 1995 $77 thousands (+13% vs. previous year) • Clarkson is currently at the limit of its current bank borrowing ($400,000) • How quickly has Clarkson’s borrowing escalated? • Bank debt increased from $60 in 1994 to $390 thousands in 1995 • Growth in accounts payable and in notes payable, trade • Why? Buyout: • Clarkson is paying his purchase of Holtz’s stake. • Growth in NWC requirements • So far: forced to forego trade discounts and rely on bank borrowing. Current bank now requires collateral, so explore...
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...Overview Clarkson Lumber Company is a classic example of a privately held company that has experienced a rapid growth in sales and has reached a point where it is facing a shortage of cash to sustain the expected growth in sales in the following years. The owner, Keith Clarkson, bought out his partner’s interest in the company in 1994 for $200,000. His partner, Henry Holtz, took a note for the $200,000 with an interest rate of 11% and was repayable in the semi-annual installments of $50,000 beginning June 30, 1995. The note was taken to give Mr. Clarkson time to arrange for the necessary financing. Mr. Clarkson seems to be running the company well, evident by the constant growth in sales year after year. However, the company is running low on cash on hand, and needs some form of financing to reach the expected sales of 5.5 Million in 1996.Moreover, the borrowing limit set by the Suburban Bank has been reached, prompting the bank to ask Mr. Clarkson to guarantee the loan personally. Mr. Clarkson has been in communication with another bank, Northrup Bank, which might be willing to extend a line of credit of up to $750,000. Analysis There are several reasons for Mr. Clarkson’s need to rely on borrowing despite good profits. Although the profits are good, they are not good enough in our view. The Net Profit Margin has been close to 2% since 1993 (Exhibit D).The cost of goods relative to the sales is high and is keeping the profit margin low. In other words, the costs have...
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...Clarkson Lumber Company Problem Analysis: According to Exhibit 1, after computing the net profit margin, we can see that since 1993, the return on sales are 2%, 1.96%, 1.7%, which indicate the first problem. The cost of goods relative to the sales was high which caused the return on sales are too low comparing to the industry level, which also means the costs grew faster than the sales. Secondly, according to Exhibit 2, after computing the days sales outstanding, since 1993, they were 38, 43, 49 which were too high. This may cause bad debt. If DSO can be lower, it can help the company deal with its fund shortage problem. The third problem is that the debt to asset ratio was too high in 1995. After computing according to Exhibit 2, the debt to asset in 1995 was 73%, which raise a red flag, and this will make it relatively costly for the company to borrow additional funds without first raising more equity. The fourth problem is that the return on assets was 4.7% in 1995. This ratio was low comparing to the industry level due to high total assets. Total assets are also inflated due to the liabilities taken in the form of trade credits by Mr. Clarkson. The company was holding too much inventory, which was unproductive and cost lots of storage expense. The fifth problem is that the current ratios from 1993 were too low comparing to the industry level, which indicates the company’s liquidity position is weak....
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...expense on these loans is only making the matters worse. Based on our Proforma calculations, we think that in 1996 Clarkson needs loan amount of approximately $ 1,235,000 (i.e. around $ 1.24 M) which is 65% higher than Mr. Clarkson’s estimate of $ 750,000. Even though this may not cure all the current problems at Clarkson, this will help provide much-needed immediate liquidity. By comparing sustainable and actual growth, we found that Clarkson has been growing significantly above its sustainable growth rate and also observed that the difference between sustainable and actual growth is in excess of 40-45% range during 1994 and 1995. Based on pro forma calculations, we can infer that the difference between the actual (22%) and sustainable (19%) sales growth will come down in 1996. We think that increasing product prices is the most optimal option for Clarkson right now in order to bring down its actual sales growth rate. Other option which Clarkson should consider is profitable pruning of its business and if none of these two options yield any favorable results, then the final option should be to seek a partner for merger or get itself acquired by another company, which can provide Clarkson the needed cash for growth. Detailed Financial Analysis 1. Why is Clarkson short on funds despite its record for profitable operations? The two major reasons that Clarkson is short on funds despite its profitable operations are the...
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