...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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...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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...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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...1993 Net Working Capital Current assets Curent liabilities Working Capital A/R Inventory A/P Accrued Exp. Delta WC Financing Net retained Profit Extra Notes payable Bank Delta Cash 411 686 275 388 306 337 213 42 1994 330 895 565 458 411 432 340 45 70 1995 161 1249 1088 742 606 587 376 75 284 1996-Q1 170 1243 1073 759 583 607 364 67 17 1996-Est 0 68 60 77 330 5 9 Profitability 1993 74 2921 2,53% 60 504 12% 1994 84 3477 2,42% 68 372 18% 1995 99 4519 2,19% 77 449 17% 1996-Q1 6 1062 0,56% 5 454 N.A. 1996-Est PBT Sales PBT/Sales Net income Net worth ROE 1993 Invetory turnover ACP DPO CCC AVG 54,52 37,71 34,72 57,51 57,267 1994 52,55 42,55 44,85 50,25 1995 53,57 48,27 37,8 64,04 53,5466667 42,8433333 39,1233333 376 3579 127 360 50,5951383 CCC expresse in "Days of Sales" ( ( + + ) / ) x NTC : Net trade Cycle INV A/R A/P Sales 360 41,04 46 7,9 79,14 Q1 Sales COGS Gross Profit Operating expenses EBIT Interest expense Net income before taxes Taxes Net income 1.062 819 243 244 -1 16,75 -18 0 -18 0% 1996 Q2+Q3 3.025 2.299 726 620 106 31,875 74 9,5 65 13% Q4 1.413 1.074 339 297 42 15,125 27 7,99 19 29% Total 5500 4.192 1.308 1.161 147 63,75 84 17,49 66 21% 5500 4.150 1.350 1.161 189 84,75 105 24,2 80 23% -42 21 50 25 11 0,15 0,25 0,34 7,5 6,25 3,74 17,49 50 25 25 5 0,15 0,25 0,34 0,39 7,5 6,25 8,5 1,95 24,2 1995 Projected balance sheet Cash A/R Inventory Current assets Property net Total assets Notes...
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...To: Loan Committee, Northrup National Bank Date: September 17, 2014 Re: Clarkson Lumber Company Loan Application Overview Borrower: Keith Clarkson, sole owner and president of the Clarkson Lumber Company Purpose: To support rapid growth in business during recent years and anticipated further substantial increase in sales, allowing Mr. Clarkson to fully utilize trade discounts to improve profitability. Request / Amount: Not to exceed $750,000 Rate: Set on a floating rate basis at two percent above the prime rate; initially approximately 11.0% Term: Revolving, secured, 90-day note Estimated Loan Requirements The loan amount required by Clarkson Lumber to finance the expected expansion in sales to $5.5 million in 1996 and to take all trade discounts can be calculated using the pro forma income statement and balance sheet (see pro forma). By balancing the values of bank notes with the total assets and liabilities, we have concluded that Mr. Clarkson’s estimate is under-stated. Expansion Rate Risk: If Clarkson Lumber continues to expand at such a rapid rate that cannot be financed proportionally from retained earnings, the company will be left in a very vulnerable high risk position. The company needs larger amounts of bank financing for longer terms than Mr. Clarkston realizes. Actual Loan Amount Required: $XXX,000 Loan Request Decision Based on Clarkson Lumber's past financial performance, it’s increasing debt and decreasing financial health, and...
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...The Clarkson Lumber case is about Mr. Clarkson seeking a loan that does not require a personal guarantee. The Northrup National Bank is in the process of investigating the Clarkson Lumber Company to whether or not to extend a line of credit of $750,000. However, Mr. Clarkson was only seeking for fewer amounts; thus, he assumed the line of credit would be an advantage to generate more profits into his company. In addition, The Clarkson Lumber Company is waiting on its approval based on its financial statements. Therefore, I believe Northrup National Bank should not extend the line of credit to Mr. Clarkson and his company due to the company’s highly leveraged. In 1993, a financial ratio of debt/equity of 0.82 shows a good sign of the company that they were not using its debt quite often to produce a larger profit. Although, as the years progressed, the Clarkson Lumber Company’s debt equity ratio began to increase each year until it reached a debt/equity of 2.58 in 1996. Therefore, the company has two dollars of debt for every dollar of equity. If Mr. Clarkson generates more profit through his company, it may result into volatile earnings since the company holds more risk because of too much borrowing. Since the company was short in cash, Mr. Clarkson assumed that by borrowing more and more will resolve the issue. Nevertheless, by having the Clarkson Lumber Company used too much of its debt definitely misled Mr. Clarkson’s vision since he did not realize how much of his company’s...
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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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...rapid growth in Mr. Clarkson Lumber’s business, and an anticipated future substantial increase in sales in the 1996, the problem for Mr. Clarkson was a shortage of cash and had found it necessary to increase it borrowing. Nonetheless the company had a consistent profitability, the company still had serious shortage with cash due to several reasons. The key problem for Mr. Clarkson is should they give up the current limited trade creidt in order to get a bigger loan from a much larger bank Northrup National Bank. 2. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? Nonetheless, Clarkson Lumber had a consistent profitability in the past years. The several reasons still make Mr. Clarkson in cash shortage trouble. First, in 1994, Mr. Clarkson bought out Mr. Holtz’s interest for $200,000. And Mr. Holtz had taken a note for $200,000 with 11% interest to be paid off semi-annually with a installment of $50,000 from 1995 to1996. Second, what’s more, in 1996, Mr. Holtz will take a part of cash from Clarkson Lumber. Especially, semi-annually payment in June will meet a seasonal peak of sales from April to September. The working capital of Clarkson Lumber may meet a more heavy shortage than the past. Third, and one of most improtant reason is Clarkson Lumber need additional funds to support their business growth. However, Suburban National Bank only provided a maximum trade criedt at $400,000, but Clarkson Lumber was needing to increase...
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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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...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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...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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...MEMO RE CLARKSON LUMBER TO: President, Northrup National Bank FROM: George Dodge Loans Officer, Northrup National Bank Clarkson Lumber Company is owned and operated by the hardworking, 49-year-old Mr. Clarkson.With relatively low operating expenses, operated by a small number of staff and a strong management. Clarkson Lumber is a company experiencing rapid growth with an anticipation of a further increase in sales. However the company has constant cash flow problems. The financial ratios in appendix III look poor due to their current state of under financing. Why is the Clarkson Company so short of funds despite its record of profitable operations? See Appendix I, II&III. We find that increasing amount of borrowing despite of its onsistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 55% from 1993-1995, the assets that support increase of sales increased by 78%. The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995. The net profit margin and operating expenses ratio have been stable over three years, however, interest expenses has increased almost 1.5 times. The firm’s current ratio deteriorated again and as a result, the firm has experienced the shortage of fund regardless of its consistent profitability. Second is the amount of note payable against Holtz. Mr...
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... 1) Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? a) Clarkson Lumber has experienced a rapid growth in sales (see net sales below) and the company is finding it hard to find cash to sustain their level of growth (see notes payable below). The amount of working capital needed is outpacing the ability of the company to produce the funds themselves. To keep up with the increase of sales they need to borrow funds to increase their purchases (see Purchases below). • Net Sales = 1993-94 +19.0%, 1994-95 +30.0% • Notes Payable = 1993 $0, 1994 $160, 1995 $490 • Purchases = 1993-94 +23.5%, 1994-95 +31.1% Compounding the problem is an increase in accounts payable over time which is contributing to the shortage of cash (see accounts payable below) and again at the same time purchases are increasing (see purchases below), again leaving the company with less cash. • Accounts Payable = 1993 $213, 1994 $340, 1995 $376 • Purchases = 1993-94 +23.5%, 1994-95 +31.1% An additional contributor to the cash shortage is the fact that the accounts receivable per sales is also increasing over time (see AR/Sales below). Clarkson Lumber is taking a longer time to collect from their customers, leaving the company longer without that cash. By 1995 the AR/Sales ratio is in line with other low profit lumber outlets in the industry (which is 13.7%). • AR/Sales = 1993 10.5%, 1994 11.8%, 1995 13.4% 2) How has Mr. Clarkson met the financing...
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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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...|Administración Financiera I | | CLARKSON LUMBER COMPANY 1. SITUACION DE LA EMPRESA En la primavera de 1996, Clarkson Lumber Company esperaba un incremento en sus ventas, pero a pesar de contar con un buen nivel de rentabilidad, la empresa había sufrido una escasez de caja y se había visto obligada a aumentar su crédito a principios de 1996 en el Suburban National Bank a $399,000, el limite o tope para líneas de crédito en el banco era de $400,000, y ahora le pedían al Sr. Clarkson garantizar su préstamo de forma personal, por lo que estaba decidido a establecer una nueva relación bancaria en la que pudiera tener un crédito mayor sin tener que garantizarlo de manera personal. La empresa ofrecía descuentos por volumen y pago a 30 dias para sus clientes de cuenta corriente. Clarkson Lumber Company era una sociedad entre Keith Clarkson y su cuñado Henry Holtz. Alrededor del 55% del total de sus ventas anuales tenían lugar a los meses entre abril y septiembre. Las ventas anuales eran de $2,291,000 en 1993, $3,477,000 en 1994 y $4,519,000 en 1995, y habían generado utilidades después de impuestos de $60,000 en 1993, $68,000 en 1994 y $77,000 en 1995. 2. CONTEXTO DEL PROBLEMA Tiempo atrás el Sr. Clarkson había conocido al Sr. George Dodge, ejecutivo de un banco mas grande, el Northrup National Bank y habían...
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