Clarkson Lumber Company Essay

(1) BackgroundCLC was founded in 1981 by Mr. Clarkson and brother-in-law Henry Holtz in the Pacific Northwest. The caller-out has experienced rapid growth over the recent years and it is anticipated to continue. Mr. Clarkson bought bulge out Mr. Holtz for $200,000 to become the sole owner. This resulted in the need of more cash inflow from the bank. Even with consistent profits, the company has suffered a shortage of cash and has borrowed funds needed for business growth.(2) Major Problem(s)CLCs current dimension (formula 1) has deteriorated which led to a shortage of funds while still being profitable. The companys fair collection period (formula 2) and debt ratio (formula 3) have increased which also signals problems. CLC buys its inventory in large quantities from the suppliers in order to take advantage of a 2% trade discount but has been unable to feature the discount due to the increasing average collection period and inventory turnover.(3) Alternative Courses of Actioni. stimulate more bank opinionii. Reduce rate of growth to more sustainable leveliii. appraise customers who can purchase on credit(4) Brief Analysis of Alternativesi. CLC must improve their current ratio to ensure the bank it will have the ability to repay a larger loan. ii. CLC has seen operating spending increase dramatically between 1993 and 1995. CLC ask to reconsider the amount of inventory to be held on egest and scale back operations if inventory turnover continues to increase. iii. Due to the increasing average collection period, CLC needs to seriously reconsider allowing some customers to purchase on credit and do more thorough credit analysis. An increasing average collection period does not allow CLC to take advantage of the 10 sidereal day 2% trade discount.(5) Suggested Course of ActionCLC should seek to increase the $750,000 loan from the bank but with sober restrictions. The company should be required to shrivel accounts receivable and inventory and strict con trol of future investments to reduce cash outflow. Formula 1 Current Ratio1993 $686/275 = 2.491994 $895/565 = 1.581995 $1249/1188 = 1.05Formula 2 Average Collection expiration1993 $306/(2921/365) = 38.241994 $411/(3477/365) = 43.151995 $606/(4519/365) = 48.95Formula 3 Debt Ratio1993 $415/919 = .451994 $785/1157 = .681995 $1188/1637 = .73