Clarkson Lumber Company Essay

(1) Background: CLC was founded in 1981 by Mr. Clarkson and brother-in-law Henry Holtz in the Pacific Northwest. The company has experienced rapid growth over the recent years and it is anticipated to continue. Mr. Clarkson bought out Mr. Holtz for $200,000 to become the sole owner. This resulted in the need of more cash inflow from the bank. Even with consistent profits, the company has suffered a shortage of cash and has borrowed funds needed for business growth. (2) Major Problem(s): CLC’s current ratio (formula 1) has deteriorated which led to a shortage of funds while still being profitable. The company’s average collection period (formula 2) and debt ratio (formula 3) have increased which also signals problems. CLC buys its inventory in large quantities from the suppliers in order to take advantage of a 2% trade discount but has been unable to receive the discount due to the increasing average collection period and inventory turnover. (3) Alternative Courses of Action: i. Acquire more bank credit ii. Reduce rate of growth to more sustainable level iii. Reevaluate customers who can purchase on credit (4) Brief Analysis of Alternatives: i. CLC must improve their current ratio to ensure the bank it will have the ability to repay a larger loan. ii. CLC has seen operating expense increase dramatically between 1993 and 1995. CLC needs to reconsider the amount of inventory to be held on hand and scale back operations if inventory turnover continues to increase. iii. Due to the increasing average collection period, CLC needs to seriously reconsider allowing some customers to purchase on credit and do more thorough credit analysis. An increasing average collection period does not allow CLC to take advantage of the 10 day 2% trade discount. (5) Suggested Course of Action: CLC should seek to increase the $750,000 loan from the bank but with severe restrictions. The company should be required to reduce accounts receivable and inventory and strict control of future investments to reduce cash outflow. Formula 1: Current Ratio 1993: $686/275 = 2.49 1994: $895/565 = 1.58 1995: $1249/1188 = 1.05 Formula 2: Average Collection Period 1993: $306/(2921/365) = 38.24 1994: $411/(3477/365) = 43.15 1995: $606/(4519/365) = 48.95 Formula 3: Debt Ratio 1993: $415/919 = .45 1994: $785/1157 = .68 1995: $1188/1637 = .73