Clarkson Lumber Essay

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Clarkson Lumber Clarkson Lumber Company has been expanding at a rapid rate. The increase in revenue has increased current assets which in turn has made it difficult to keep up with debt. In addition, the buyout of Clarkson’s brother-in law has compounded the problem and need for cash. In 1995 Clarkson grew 29% and while the actual sustainable growth rate was 21%. FY96 sales projections of $5.5 show that if the percentage of sales were to remain constant in the balance sheet, they would need an additional $357K of funding (cash) to keep up with bill payment. In addition to the $357K in additional funding Clarkson would be required to roll in their current line of credit of $399K bringing the required amount to $756K. In short, if no changes are made to the management of short term assets Clarkson will be absorbing his funds into new assets at a faster rate than he can earn funds through profit margin by having high levels of inventory and an inefficient receivables turnover. It is clear that Clarkson Lumber will need an infusion of cash to sustain the current growth rate. As a banker I would not approve Clarkson lumber request without conditions. The current request of $750K would not be enough fund the business in its current state. The business requires $357K for projected sales for 1996 and the current line of $399K would have to be rolled in. This would completely max out the requested amount. I would recommend that Mr. Dodge only approve the additional line of credit if the following conditions were met: Reduce A/R collection period from 43 days to 30 days, increase turnover ratio to 1993 level of 6.5 and 10 day payment of trade credit to take advantage of the early pay discounts. These changes would bring additional cash flow allowing Clarkson to pay off some debt while maintaining his current

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