Suggestion as Butler’s financial advisor

Butler Lumber Company is on a growing path. It is evident from the case that the volume has been
built due to successful price competition, careful control of operating expenses and purchases at
substantial discounts. Even in case of an economic downturn its business is protected to a large
extent as 55% of its sales are from the repair market. The company is growing at a good pace of 19%,
34% and 34% for the year 1989, 1990 and 1991 respectively. The data is tabulated below.

% increase in sales of Butler Lumber Company

Net Sales 1988 1989 1990 Expected 1991 1991 first quarter
1697000 2013000 2694000 3600000 718000
Increase NA 316000 681000 906000
% Increase NA 18.621096 33.830104 33.63028953
All amounts in $

The company has a considerable amount of debt also which is tabulated below

Current outstanding debts of Butler Lumber Company

Particulars Year 1991
Notes Payable, bank 247000
Notes Payable, trade 157000
Accounts payable 157000
Accrued expenses 36000

Total Debt 597000

All amounts in $

As his financial advisor I would suggest Mr. Butler to go for this loan amount. This would help in
meeting the expansion and sustaining the growth of his company. Even though the operating
expense for 1990 is 658000 and a purchase of 2042000 which is an increase of 34 % and 27.7 % over
the previous year, respectively the growth is promising. The amount of $465000 might be needed in
chunks and would help him repay a substantial amount of his debt.

Suggestion as a banker

As a banker I won’t sanction him this loan due to following reasons.

As mentioned in the case, “The maximum loan that Suburban National Bank would make to any one
borrower was $250000,and Butler Lumber had been able to stay within this limit only by relying
heavily on trade credit”. The company required $247000.

Implications: Butler needed more than $247000 and the remaining amount it was getting from trade
credit which is a costly instrument. This increases company’s risks. As Terms of 2% 10 days, net 30
days (2% discount if paid in 10 days, the net [full] amount due in 30 days) translate into a 36% annual
interest rate if not taken advantage of. This shows that Butler is in heavy need of cash in spite of its
increasing sales. Further it has a personal obligation of $38000 as a mortgage on his housing loan.

What if there is a recession then in that case the project sales of $3.6 million won’t be met. A loan of
$ 465000 won’t be a prudent sanction as its not certain that his net profit is sustainable in the long
range. This can be further solidified by the fact that even though the company is growing Butler has
no plans of increasing his manpower. This is owed to the fact he wants to control the whole business
on his own .This may lead to an inefficient management.