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ASSESSING FIRMS FUTURE FINANCIAL
REQUIREMENTSA case study on
Butler Lumber Co.
Presented By: Group 1
Abhijit Chakravarty Roll No. 12PGPWE001Abhishek 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
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FINANCING NEEDS: WHY?
External Financing Needs
FutureRevenues
FinancialRatios
SalesOutlook
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CASE SYNOPSIS
Butler Lumber Company
A growing profitable business with projectedsubstantial increase in its level of activities hasexhausted its credit limit of $ 2,50,000/-.
The company is now considering to go forenhancement in its credit facilities by raising itscredit limit to $ 4,65,000/- by switching to anotherbank.
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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/-, financedby loan of $ 70,000/- carrying interest of 11%, repayable in quarterlyinstalments of $ 7,000/- for next 10 years.
Company was experiencing shortage of cash and wanted to increaseborrowings which presently is $ 247,000 from Suburban Bank.
Butler Contacts Northrop Bank which tentatively agrees to lendsecured 90 day note not exceeding $ 465,000 at an interest of10.5%.
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OPERATIONSTRATEGYOF BUTLER LUMBERCO.
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.
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TRADE TERMSOF 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 notavailed purchase discounts because of shortageof funds.
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THEKEYISSUESFACINGITARE:
Need for additional funds to expand
Improve cash flexibility
Need to consolidate debt
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OPERATING STATEMENTS
1988 1989 1990 1991 Q1
1991
Projections
Net Sales1697 2013 2694 718 3600
CoGS Op. Inventory 183 239 326 418 418
Purchases 1278 1524 2042 660 2722
1461 1763 2368 1078 3140
Clo. Inventory 239 326 418 556 551
Total COGS 1222 1437 1950 522 2589
Gross Profit 475 576 744 196 1011
Operating Expenses 425 515 658 175 901
PBIT 50 61 86 21 110
Interest Expenses 13 20 33 10 48
PBT 37 41 53 11 62
Prov. For Taxes 6 7 9 2 11
PAT 31 34 44 9 51
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Balance Sheet 1988 1989 1990 1991 Q1 1991(Proj)
Cash 58 48 41 31 55
AR 171 222 317 345 424
Inventory 239 326 418 556 559
Total CA 468 596 776 932 1037
FA 126 140 157 162 210
Total Assets 594 736 933 1094 1247
Notes Payable to Bank 0 146 233 247 403
Notes Payable to Stark 105 0 0 0 0
Notes Payable for Trade 0 0 0 157 0
Accounts Payable 124 192 256 243 342
Accrued Expenses 24 30 3936
52Long Term Debts in next 12m 7 7 7 7 7
Total Current Liabilities 260 375 535 690 804
Long Term Debts 64 57 50 47 43
Capital / Net Worth 270 304 348 357 400
Total Liabilities 594 736 933 1094 1247
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INVIGILATORS QUESTIONS
Why does Mr. Butler have to borrow so much money tosupport this profitable business?
Do you agree with his estimate of the companys loan
requirements? How much will be need to borrow tofinance his expected expansion in sales (assume a 1991sales volume of $3.6 million)?
As Mr. Butlers financial adviser, would you urge him to
go ahead with, or to reconsider, his anticipated expansionand his plans for additional debt financing? As thebanker, would you approve Mr. Butlers loan request,and, if so, what conditions would you put on the loan?
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TOOLS USEDFORARRIVINGATRECOMMENDATION
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 isprojected to increase to $55K for FY 1991.
Current ratio, quick ratio and cash ratio have been decreasingthroughout the year (Indicating lower liquidity).
COLLECTION AND PAYMENT PERIOD:
Average Collection Period Days during the last 3 years haveremained around 36 days as against Average Payment Period Daysof around 38 days.
INVENTORY TURNOVER: Days in inventory during the last 3 years have remained around 71
days. However, the same in projected to be around 68 days.
LONG TERM DEBTS: Interest of Stark's was bought in 1988 with long term loans.
INTEREST PAYMENTS: Interest expenses have been increasing (times interest earned
decreased from 3.846 in 1988 to 2.606 in 1990)12
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FUND FLOW STATEMENT1989 1990 1991
1 SOURCES
Net Profit (after tax ) 34 44 52
Increase in Capital 34 44 52TOTAL 68 88 104
2 USES
Decrease in Term Liabilities 112 7 7
Increase in Fixed Assets 14 17 53
TOTAL 126 24 60
3 Long Term Surplus / Deficit -58 64 444 Increase / Decrease in Current Assets * 128 180 253
5 Increase / Decrease in Current Liabilities 74 73 99
6 Increase / Decrease in Working Capital Gap 54 107 154
7 Net Surplus ( + ) / ( - ) -112 -43 -110
8 Increase / Decrease in Bank Borrowings 146 87 170
INCREASE / DECREASE IN NET SALES 316 681 906
* Break - up of ( 4 )
Increase / Decrease in Finished goods 87 92 133
Increase / Decrease in Receivables 51 95 107
Increase / Decrease in Other Current Assets -10 -7 13
Total 128 180 253
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FINANCIALHEALTHASSESSMENTTOOLS
ProfitabilityRatios
Net profitmargin
Return onEquity
Gross Profit
Ratio
Activity Ratios
Sales toAsset Ratio
ReceivablesTurnover
Inventory
TurnoverRatio
LeverageRatios
Debt Ratio Times
InterestEarned Ratio
No of Days
Payables
LiquidityRatios
CurrentRatio
Quick Ratio
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PROFITABILITY RATIOS
27.991% 28.614% 27.617% 27.298%
2.539% 2.683% 2.858% 2.646%0.000%
5.000%
10.000%15.000%
20.000%
25.000%
30.000%
35.000%
40.000%
45.000%
50.000%
1988 1989 1990 1991Q1
GP RATIO
NP MARGIN
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ACTIVITY RATIOS
2.857 3.027 3.228 2.834
5.113 5.087 5.242
4.287
9.92410.244 9.996
8.677
10.3069.646
9.116
8.049
0
2
4
6
8
10
12
1988 1989 1990 1991Q1
SAR
IT
RT
PT
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LEVERAGE RATIOS
0.192 0.158 0.126 0.116
3.846
3.052.606
2.1
0.395 0.409 0.455 0.457
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1988 1989 1990 1991Q1
DEBT RATIO
TIMES INT EAR
DEBT RATIO INC
ST
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LIQUIDITY RATIOS
1.8
1.589
1.45
1.351
0.881
0.72 0.669
0.545
0
0.2
0.40.6
0.8
1
1.2
1.4
1.6
1.8
2
1988 1989 1990 1991Q1
CR
QR
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SWOT ANALYSIS
Positive image amongst itscustomers
Conservative in operations
Highly centralised model ofmanagement
Poor Liquidity and efficiencyratios
Control over operatingexpenses
Demand relativelyprotected from economicfluctuations
Strength Weakness
OpportuntiesThreats
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NEED FOR BORROWING MONEY??
Cash tied up with inventory Can be improved by working
on receivables turnover ratio
Shortage ofCash
Loan of $70,000 @ 11%interest compounded to cashshortage problem
DebtConsolidation
Additional investments inworking capital and inventorieswill be required to meet thesales volume
Expansion20
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HOW MUCH TO BORROW??
Assuming 1991 sales volume of $3.6 millioncompanys loan estimation is overstated
Loan of $ 403,000 will be sufficient for sales volume
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SUGGESTIONS AS A FINANCIALADVISOR
Sales growth of 33.63% in 1991 over 1990 to $3.6million is tenable
Additional cash for inventories and working capitalis required to meet the sales
Go ahead for getting anextended 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 AssetRatio in addition to improving the Current, Quick and Cash Ratioby 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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