kClarkson Lumber Case
1. Briefly, what is Clarkson’s business, in what stage is Clarkson in its development, and what are its future plans? What are the key notable features of its operations? How has Clarkson fueled expansion in the past?
Clarkson’s operations were limited to the retail distribution of lumber products in the local area. Typical products included plywood moldings and sash and door products. Clarkson Lumber is a company experiencing rapid growth but with a constant cash flow crisis. For its future plans, the company needs more loans to increase its cash liquidity. The key notable features of its operations are that it has low operating expenses, a small staff, and strong ...view middle of the document...
52 and 1.31 respectively. Clarkson cushion of working capital is dropping steadily. Decreasing Inventory Turnover Ratio turned their inventory over 7.5 times, but in 1999 they only managed to turn it over 6.3 times. In other works, in 1993 Clarkson Lumber moved their inventory, on average, in 55 days. In 1995 it took them 62 days. This kind of delay is costly in terms of cash flow. For detailed figure, please refer to Appendix I.
3. Why is Clarkson so short of funds despite consistent profitability and expansion? Discuss the cash cycle and inventory turnover in detail .what is it about those numbers that are contributing to Clarkson’s dilemma?
There are several reasons that Clarkson had cash flow crisis despite consistent profitability and expansion. One reason is Mr. Clarkson's decision in 1994 to buy out his partner Mr. Holtz. The note had 4 semi-annual installments of $50,000 beginning June 30, 1995 with an 11% interest rate. Clarkson Lumber is not generating enough profit to pay off this debt in such a short space of time. Basically the debt repayment terms do not match the financial strength of the business. Secondly, Suburban National Bank is consistently insufficient to meet the company’s growing needs. Thirdly, the company relies heavily on trade credit. Inadequate financing is preventing Clarkson from taking advantage of trade discounts offered for payment made within ten days of invoice date. With the growth of the cash conversion cycle, especially in 1995 and 1996, the Clarkson’s company drops in the dilemma. The average inventory processing period and payable payment period keep steady in 1995, and has significant growth in 1996. The average collection period is continues increasing and the cash conversion cycle having significant growth in 1996.
4. Is this amount of sales growth sustainable? What will the financial condition of the company be if it did continue to grow in this way?
My conclusion for this scenario is that the situation is unsustainable given the current credit ceiling of $400,000 from Suburban Bank. When the sale is 5.5 million, we get g-ratio is 23.4% which is bigger than sales growth ratio 21.7%. Therefore, the sales grow is unsustainable.（Appendix II）If the amount of sales growth continued to be sustainable, as we calculated that there is a plug ($236,000) between Total assets and Total liabilities & Net worth without a new loan.（Appendix II）
5. Is it a good idea to continue to try to fund growth using working capital? How would one accomplish this? What is the cost of doing so, i.e. how attractive are the trade discounts offered?
Yes, it’s a good idea to continue to try to fund growth using working capital. If without a new loan, we need to compensate for the funding gap, such as increasing the account payable. But, that will deteriorate the relationship with suppliers.
Cost of cash discount = [discount rate / (1- discount rate)]*[360 / ( credit period- discount period)]
We get Cost of cash discount...