ASSESSING FIRMS FUTURE FINANCIAL REQUIREMENTS

A case study on

Butler Lumber Co.

Presented By: Group 1 Abhijit Chakravarty Roll No. 12PGPWE001 Abhishek Agrawal Roll No.12PGPWE002 Abhishek Pruthi Roll No.12PGPWE003 Anu Ranjan Roll No.12PGPWE004 Anurag Rao Roll No.12PGPWE006 Anil Kumar Bhardwaj Roll No.12PGPWE005

FINANCING NEEDS: WHY?

Financial Ratios

Sales Outlook

Future Revenues

External Financing Needs

CASE SYNOPSIS
Butler Lumber Company A growing profitable business with projected substantial increase in its level of activities has exhausted its credit limit of $ 2,50,000/-. The company is now considering to go for enhancement in its credit facilities by raising its credit limit to $ 4,65,000/- by switching to another bank.

BACKGROUND
Butler Lumber Company

Incorporated with Mark Butler and Henry Stark as partners. Products included plywood, mouldings, sash and door products. Did business of retail distribution in local area. Mark Butler bought out Henry Starks share for $ 1,05,000/-, financed by loan of $ 70,000/- carrying interest of 11%, repayable in quarterly instalments of $ 7,000/- for next 10 years. Company was experiencing shortage of cash and wanted to increase borrowings which presently is $ 247,000 from Suburban Bank. Butler Contacts Northrop Bank which tentatively agrees to lend secured 90 day note not exceeding $ 465,000 at an interest of 10.5%.
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OPERATION STRATEGY OF BUTLER LUMBER CO.

Price Competition Control of operating expenses Quantity purchase of materials No salesmen i.e. all orders taken on phone Products sold mainly used for repair work. 55% sales during period April to Sept.

TRADE TERMS OF BUTLER LUMBER

To customers: Quantity discounts Credit terms of net 30 days

From Vendors 2% discounts if payment made within 10 days All accounts became due in 30 days During last two years, the company had not availed purchase discounts because of shortage of funds.
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THE KEY ISSUES FACING IT ARE:

Need for additional funds to expand Improve cash flexibility Need to consolidate debt

OPERATING STATEMENTS
1988 1697 Op. Inventory Purchases 183 1278 1461 Clo. Inventory 239 1989 2013 239 1524 1763 326 1990 2694 326 2042 2368 418 1991 Q1 718 418 660 1078 556

Net Sales
CoGS

1991 Projections 3600

418 2722 3140 551

Total COGS
Gross Profit Operating Expenses PBIT Interest Expenses

1222
475 425 50 13

1437
576 515 61 20

1950
744 658 86 33

522
196 175 21 10

2589
1011 901 110 48

PBT
Prov. For Taxes PAT

37
6 31

41
7 34

53
9 44

11
2 9

62
8 11

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Balance Sheet Cash AR Inventory Total CA FA Total Assets Notes Payable to Bank

1988 58 171 239 468 126 594 0

1989 48 222 326 596 140 736 146

1990 41 317 418 776 157 933 233

1991 Q1 31 345 556 932 162 1094 247

1991(Proj)
55 424 559 1037 210 1247 403

Notes Payable to Stark

Notes Payable for Trade

105
0

0
0

0
0

0
157

0
0

Accounts Payable
Accrued Expenses

124
24

192
30

256
39

243
36

342
52

Long Term Debts in next 12m

Total Current Liabilities Long Term Debts Capital / Net Worth Total Liabilities

7
260 64 270 594

7
375 57 304 736

7
535 50 348 933

7
690 47 357 1094

7
804
9

43

400

1247

INVIGILATORS QUESTIONS

Why does Mr. Butler have to borrow so much money to support this profitable business? Do you agree with his estimate of the companys loan requirements? How much will be need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)? As Mr. Butlers financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butlers loan request, and, if so, what conditions would you put on the loan? 10

TOOLS USED FOR ARRIVING AT RECOMMENDATION

Review of Financial Performance Fund Flow Statements Ratio Analysis Trend Analysis SWOT Analysis

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FINANCIAL HIGHLIGHTS:

LIQUIDITY:
Cash has been decreasing from 1988 till 1990. However, it is projected to increase to $55K for FY 1991. Current ratio, quick ratio and cash ratio have been decreasing throughout the year (Indicating lower liquidity).

COLLECTION AND PAYMENT PERIOD:

Average Collection Period Days during the last 3 years have remained around 36 days as against Average Payment Period Days of around 38 days. Days in inventory during the last 3 years have remained around 71 days. However, the same in projected to be around 68 days.

INVENTORY TURNOVER:

LONG TERM DEBTS:

Interest of Stark's was bought in 1988 with long term loans.

Interest expenses have been increasing (times interest earned decreased from 3.846 in 1988 to 2.606 in 1990)
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INTEREST PAYMENTS:

FUND FLOW STATEMENT

1989
1 SOURCES Net Profit (after tax ) Increase in Capital TOTAL USES Decrease in Term Liabilities Increase in Fixed Assets TOTAL Long Term Surplus / Deficit Increase / Decrease in Current Assets * Increase / Decrease in Current Liabilities Increase / Decrease in Working Capital Gap Net Surplus ( + ) / ( - ) Increase / Decrease in Bank Borrowings INCREASE / DECREASE IN NET SALES * Break - up of ( 4 ) Increase / Decrease in Finished goods Increase / Decrease in Receivables Increase / Decrease in Other Current Assets Total 34 34 68 112 14 126 -58 128 74 54 -112 146 316

1990
44 44 88 7 17 24 64 180 73 107 -43 87 681

1991
52 52 104 7 53 60 44 253 99 154 -110 170 906

3 4 5 6 7 8

87 51 -10 128

92 95 -7 180

133 107 13 13 253

FINANCIAL HEALTH ASSESSMENT TOOLS

Profitability Ratios

Activity Ratios
Sales to Asset Ratio Receivables Turnover Inventory Turnover Ratio

Leverage Ratios Debt Ratio Times Interest Earned Ratio No of Days Payables

Liquidity Ratios Current Ratio Quick Ratio

Net profit margin Return on Equity Gross Profit Ratio

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PROFITABILITY RATIOS
50.000% 45.000% 40.000% 35.000% 30.000% GP RATIO NP MARGIN

27.991%

28.614%

25.000%
20.000% 15.000% 10.000% 5.000% 0.000% 2.539% 1988 2.683% 1989

27.617%

27.298%

2.858% 1990

2.646%
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1991Q1

ACTIVITY RATIOS
12 10 8 10.306 9.924 10.244 9.646

9.996 9.116

8.677 8.049 SAR IT RT PT

6 5.113
4 2.857 2 0 1988 1989 1990 1991Q1 3.027 3.228 5.087 5.242 4.287 2.834

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LEVERAGE RATIOS
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 0.395 0.192 1988 3.05 2.606 2.1 TIMES INT EAR DEBT RATIO INC ST DEBT RATIO 3.846

0.409 0.158
1989

0.455 0.126 1990

0.457 0.116 1991Q1

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LIQUIDITY RATIOS
2 1.8 1.6 1.4 1.2 1.8 1.589 1.45 1.351 CR QR 0.72 0.669

1
0.8 0.6 0.4 0.2 0 1988 1989 1990 1991Q1

0.881 0.545

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SWOT ANALYSIS
Control over operating expenses Demand relatively protected from economic fluctuations Highly centralised model of management Poor Liquidity and efficiency ratios

Strength

Weakness

Threats
Conservative in operations

Opportunties
Positive image amongst its customers

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NEED FOR BORROWING MONEY??

Shortage of Cash

Cash tied up with inventory Can be improved by working on receivables turnover ratio

Debt Consolidation

Loan of $70,000 @ 11% interest compounded to cash shortage problem

Expansion

Additional investments in working capital and inventories will be required to meet the sales volume

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HOW MUCH TO BORROW??

Assuming 1991 sales volume of $3.6 million companys loan estimation is overstated Loan of $ 403,000 will be sufficient for sales volume

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SUGGESTIONS AS A FINANCIAL ADVISOR

Sales growth of 33.63% in 1991 over 1990 to $3.6 million is tenable Additional cash for inventories and working capital is required to meet the sales

Go ahead for getting an extended line of credit!!

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BANKERS PERSPECTIVE
As

Bankers we would

not approve the loan of $465K, rather we would approve the loan of $403K. The same is based on the projections of 1991.

Conditions of Sanction: The Company will improve its Net Working Capital to Total Asset Ratio in addition to improving the Current, Quick and Cash Ratio by induction of fresh capital The Company will resort to better management of inventory, account receivable in order to ensure sufficient liquidity

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Thank You

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