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Mr. Cartwright has to borrow substantial amounts of money due to various reasons. The most influential reason is probably the fact that the firm’s sales are rising rather fast compared to available funds. This leads to higher cost of goods sold and means that the firm needs more and more external financing to pay its invoices. Cartwright Lumber Company’s current ratio and quick ratio’s stand by this fact. The Current Ratio is approximately 1,40 (932/690) and the Quick Ratio is around 0,50 ((932-556)/690). The Current Ratio seems to be on an adequate level but the Quick Ratio can be considered to be alarming. This is because the company has such a large inventory. The Quick Ratio is considered to give a more realistic picture of the firm’s short-term financing ability because inventory can’t necessary be realized to liquid funds. The poor status of these ratios leads to the situation where the company can’t use the offered purchase discounts.

The Internal growth rate of a company is the highest level of growth it can achieve without outside financing. Cartwright Lumber’s Internal growth rate is 4,72 % (44 / 933) at the end of 2003. The firm’s sales are predicted to increase to 3,6 million from 2,7 million in2004, which is a total growth of 33%. Thus the sales are growing almost 10 times faster than the internal growth rate would allow. The sustainable growth rate is the highest growth rate a firm can sustain without the need to increase its financial leverage. The sustainable growth rate differs from the internal growth rate by taking into account the existing external financing it already has. Mr. Cartwright’s company’s SGR (Sustainable Growth Rate) is 12,6% (44/348) which is still much lower than its increasing sales.
These two facts are the main reasons why such a profitable firm might still have the need for such big amount of outside financing.