1) Is Butler Lumber Case just a bank lending / finance case?

Butler Lumber Case is not just a bank lending / finance case. Though this
case requires the financial analysis of the company, we should also
consider other factors such as the establishing the long-term relationship
between the bank and Butler Lumber Company. Through fostering this
long-term relationship, the bank is able to capitalize on Butler Lumbers
growth and cross sell the services to Butler Lumber Company.
Additionally, the bank should consider other qualitative factors such as in
this case, Butler Lumber has just been incorporated and it is located in a
growing suburb of a large city. This represents a growth potential in which
the Northrup National Bank could cross sell products. Other qualitative
factors may affect the main revenue drivers for the Butler Lumber
Company. For example, general economic slowdown may slowdown the
rate of increase in sales but it may be protected to some extent from the
fluctuations in new housing construction because of the relatively high
proportion of its repair business. As such, Butler Lumber Case is not just a
bank lending / finance case.

2) How does Butler Lumber Company make money?

The company operations were limited to the retail distribution of lumber
products in the local area. These include Plywood, moldings, and sash and
door products.

3) How is Butler Lumber Company doing financially? Is the

business profitable? (You are required to provide all the
financial trend analysis and historical financial ratios to
support your answer.)
Butler Lumber Company is well in general financially. By looking at
the sales and asset growth, the company is able to gain more in
terms of sales especially since the company is run with few
employees. With additional employees, it is able to improve its sales
growth. Taking into account of its the profitability, Butler Lumber
Company has increasing ROE along with increasing ROIC. Its credit
terms also enable the business to increase it days in payables and
its management of its inventory as a proportion of sales indicates a
better management of inventory over years.
On the flip side of the coin, there might some ratios that might
indicate otherwise such as ROA and profit margin. However, given
its strategy, the profit margin decrease is largely justified. In terms
of liquidity, both Butlers current and quick ratios along with time
interest earned have been the decreasing over the years. However,
the numbers still indicates good ability to pay off debt in case of
liquidation and still remains healthy. Similarly, in terms of gearing
and leverage, its numbers had been increasing however, given that
Butler Lumber is in a growing business, it largely reasonable for
Butler Lumber to increase its debt as a proportion of its assets.

In a nutshell, based on the financial ratios alone, Butler Lumbers

remains financially sound.

4) It seems like Butler Lumber Company is a profitable business

with reasonably efficient operations... So then why has Mr
Butler had to borrow so much money?
Butler can meet its expected sales without additional funding. If the
goal is to eliminate the trade debt, while maintaining the current
bank note at $247000, Mr. Butler would need an additional
$124,000, the remaining balance after subtracting $33,000 from the
trade credit of $157,000. But the bank will not offer this additional
funding, which would then come to $371,000 resulting in the
discussions with Northrup.
5) Given your understanding of the asset conversion lending
rationale and its application in this case, is Butler Lumber
Company is losing control over its short-term assets?
Asset conversion is about financing short-term seasonal build-ups of
working assets or financing other temporary, transactional build-ups
of current assets. In this case, Butler is facing issues due to growth
of sales along with increasing average collection period. In 1988, the
days in payables turnover had increased from 35.41 to 45.76.
Additionally, the increased from payables is due to increase in
slower payment and increased purchases. This is followed by
increased in inventory due to reduced inventory turnover and
increased sales.
6) Is trade credit a good source of financing for Butler Lumber
Company?
Trade credit is a good source of financing for Butler Lumber
Company, given the high proportion of account receivables on its
balance sheet. Additionally, the growth in its account receivables
over the years, it is imperative to consider trade financing as a
source of financing. However, it should note that while it may seems
like a good option, it may not be optimal as Butler Lumber have to
give substantial discounts at expense of growing sales. Being in the
market as one which been successful through price competition, it
may not be wise to consider trade credit as a first option.
Alternatively, Butler Lumber can look at getting trade credit with its
suppliers instead. As Butler Lumber is getting bigger, it would
enable Butler to have a better bargaining power and at the same
time, reduce the expense needed to service the loans.

7) As a banker, would you lend to Butler Lumber Company? How

would you try to control risks?
Fundamentally, Butler Lumber is a growing company and it seems
wise to look at getting a bigger line of credit in order to support it
growth story. This will require additional working capital to meet its
current obligations to his lenders and suppliers. Current liabilities
total $404,000, so the credit line under consideration will provide
additional financial flexibility, which is needed considering the
downward trend of the current ratio. Furthermore, the debt would be
carried at a more favourable rate. Finally, based on the financial
projections, Butler would have an additional $33,000 available to
begin paying down this debt by the end of 1991.
Hence, considering this and the other financial of Butler, loan should
be given out. The cash shortage is short-term problem and that the
underlying business is sound and his references and credit history
are favorable. However, there are some areas of concern that should
be monitored as a condition of the loan. First, the Days Sales A/R
ratio is trending in the wrong direction, and more effort needs to be
spent on collecting receivables in a timely manner. Additionally, the
inventory turnover is decreasing, tying up too much cash, and
exacerbating the shortage of working capital. More effort needs to
be spent on inventory management, making sure there is not a
growing amount of stagnant inventory, and that the mix is correct
for the intended market. In addition, to the condition, the bank
should require 2 important ratios (Days Sales A/R and inventory
turnover) return to their 1988 levels, and that Mark Butlers
compensation to be tied to these objectives.
8) Is there anything Butler Lumber Company can do to come up
with more cash? What should Mr Butler do?
Mr. Butler should consider improving its cash flow by both offering
trade credits to its customers and the same time negotiate with its
suppliers to offer trade credits in order to improve both its account
receivables and payables. By doing so, it is able to utilize amount of
loan for other purposes such as financing for long-term assets.
However, caution should be exercised when extending trade credit
since the cost of such trade credits may exceed the cost of
borrowing.