Clarkson Lumber

In: Business and Management

Submitted By yaoy400
Words 877
Pages 4
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. Clarkson bought out Mr. Holtz’ interest for $200,000 paid off in 1995 and 1996. Because of this cash outflow, the company needed cash inflow from bank. Thirdly, the company’s collection period (48.95 in 1995 and 38.24 in 1993) and Avg Days in inventory (62.57 in 1995 and 55.86 in 1993) are deteriorated as well.

According to the cash flow statement in Appendix II, we know that the company…...

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