Butler Lumber Company Essay

1751 Words Jan 23rd, 2014 8 Pages
Fact Pattern:
Butler Lumber is a retail distributor located in a growing suburb in the Pacific Northwest that sells basic wood products like plywood, moldings, and sash and door products. The company was formed in 1981 by Mark Butler in partnership with his brother-in-law, who Mark then bought out in 1988. The company has experienced significant growth over the past few years, and is expecting to continue to see sales growth in the coming year. Although the company has experienced increasing sales and claims to be profitable, it has been experiencing a cash shortage and Mark feels that it is going to be necessary to borrow more money in addition to the debt that he has already incurred over the course of the past few years in order to
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High sales, according to the company’s management, are said to be due to both successful price competition and by keeping operating and material prices relatively low. In terms of liquidity, the company’s current ratio shows that it is liquid, and therefore has the ability to pay back its obligations. Although the current ratio is well above 1.0 though, the cash ratio is very low, which means that it does not have enough cash to pay off obligations, and that its current assets are tied up in either inventory or accounts receivable. Looking further into both Accounts Receivable and Inventory, it appears that Butler is not as efficient as it could be at managing its assets. The Days Sales Outstanding Ratio shows that Butler is taking longer than 30 days to collect revenue after it makes a sale, and this number appears to increase each year. If the company became more efficient at collecting cash from its customers, it would have more cash to invest back into the business, and would not have to continue borrowing money and incurring more and more debt. The Inventory Turnover Ratio shows that the company appears to have a slow turnover of its inventory as well. Although Butler has seen increasing sales over the past few years, it does not appear to be very profitable. Its profit margin is very low compared to the benchmark of 7-10% that businesses should strive for, which means that it is not keeping much of

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