...To: Loan Committee, Northrup National Bank Date: September 17, 2014 Re: Clarkson Lumber Company Loan Application Overview Borrower: Keith Clarkson, sole owner and president of the Clarkson Lumber Company Purpose: To support rapid growth in business during recent years and anticipated further substantial increase in sales, allowing Mr. Clarkson to fully utilize trade discounts to improve profitability. Request / Amount: Not to exceed $750,000 Rate: Set on a floating rate basis at two percent above the prime rate; initially approximately 11.0% Term: Revolving, secured, 90-day note Estimated Loan Requirements The loan amount required by Clarkson Lumber to finance the expected expansion in sales to $5.5 million in 1996 and to take all trade discounts can be calculated using the pro forma income statement and balance sheet (see pro forma). By balancing the values of bank notes with the total assets and liabilities, we have concluded that Mr. Clarkson’s estimate is under-stated. Expansion Rate Risk: If Clarkson Lumber continues to expand at such a rapid rate that cannot be financed proportionally from retained earnings, the company will be left in a very vulnerable high risk position. The company needs larger amounts of bank financing for longer terms than Mr. Clarkston realizes. Actual Loan Amount Required: $XXX,000 Loan Request Decision Based on Clarkson Lumber's past financial performance, it’s increasing debt and decreasing financial health, and...
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...The Clarkson Lumber case is about Mr. Clarkson seeking a loan that does not require a personal guarantee. The Northrup National Bank is in the process of investigating the Clarkson Lumber Company to whether or not to extend a line of credit of $750,000. However, Mr. Clarkson was only seeking for fewer amounts; thus, he assumed the line of credit would be an advantage to generate more profits into his company. In addition, The Clarkson Lumber Company is waiting on its approval based on its financial statements. Therefore, I believe Northrup National Bank should not extend the line of credit to Mr. Clarkson and his company due to the company’s highly leveraged. In 1993, a financial ratio of debt/equity of 0.82 shows a good sign of the company that they were not using its debt quite often to produce a larger profit. Although, as the years progressed, the Clarkson Lumber Company’s debt equity ratio began to increase each year until it reached a debt/equity of 2.58 in 1996. Therefore, the company has two dollars of debt for every dollar of equity. If Mr. Clarkson generates more profit through his company, it may result into volatile earnings since the company holds more risk because of too much borrowing. Since the company was short in cash, Mr. Clarkson assumed that by borrowing more and more will resolve the issue. Nevertheless, by having the Clarkson Lumber Company used too much of its debt definitely misled Mr. Clarkson’s vision since he did not realize how much of his company’s...
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...Questions 1. Identify the key problem in the case and explaining why it is the key problem. With a rapid growth in Mr. Clarkson Lumber’s business, and an anticipated future substantial increase in sales in the 1996, the problem for Mr. Clarkson was a shortage of cash and had found it necessary to increase it borrowing. Nonetheless the company had a consistent profitability, the company still had serious shortage with cash due to several reasons. The key problem for Mr. Clarkson is should they give up the current limited trade creidt in order to get a bigger loan from a much larger bank Northrup National Bank. 2. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? Nonetheless, Clarkson Lumber had a consistent profitability in the past years. The several reasons still make Mr. Clarkson in cash shortage trouble. First, in 1994, Mr. Clarkson bought out Mr. Holtz’s interest for $200,000. And Mr. Holtz had taken a note for $200,000 with 11% interest to be paid off semi-annually with a installment of $50,000 from 1995 to1996. Second, what’s more, in 1996, Mr. Holtz will take a part of cash from Clarkson Lumber. Especially, semi-annually payment in June will meet a seasonal peak of sales from April to September. The working capital of Clarkson Lumber may meet a more heavy shortage than the past. Third, and one of most improtant reason is Clarkson Lumber need additional funds to support their business growth...
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...Clarkson Lumber Case Analysis Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? 1. Cost of Goods Sold: Even though profits have been consistent, they have not increased sufficiently. The NPM has remained close to 2%, and COGS has remained around 75%, keeping profit margins low (See Appendix Exhibit 3). Therefore, operating expenses and COGS have increased at a quicker rate than net income. Additional funds are required to not only maintain the company’s current growth rate with expected sales of 5.5 million, but also to increase purchasing power for goods. 2. Use of Cash: In addition, Mr. Clarkson bought out his partner, Mr. Holtz, for $200,000 in 1994. Mr. Holtz took a note for $200,000 to be paid off in 1995 and 1996 with interest rate of 11%, repaid in two semi-annual installments of $50,000 beginning June 30, 1995. The terms of this note are not conducive to the current cash cycle of Clarkson Lumber. He is required to pay the note in too short of time in comparison to his revenue. Mr. Clarkson also used his cash to invest in working capital (see #3) associated with the company’s increasing sales volume. This prohibited him from taking advantage of the trade discounts, which would have decreased cost of sales. 3. Asset Purchases: Clarkson Lumber had made a significant asset purchase in 1995, totaling $126,000. This could have been for the purchase of additional property to support the continued sales growth, however due to the small...
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...Financial Management – 514 Clarkson Lumber Case Study – 1 Clarkson Lumber, founded in 1981 as a partnership, is a rapidly growing business. The company has relatively low operating expenses and is a fairly profitable outfit. At first look, Clarkson appears to be a well-managed, growing, profitable company. When we dig a little deeper, issues relating to liquidity and financing arise and bring into question the ability for Clarkson to sustain growth. In terms of profitability, Clarkson is fairly consistent over the years. Please see below table for calculations: | 1993 | 1994 | 1995 | Q1 1996 | Gross Margin | 25% | 24% | 24% | 25% | Operating Margin | 3% | 4% | 3% | 2% | Net Profit Margin | 2% | 2% | 2% | 0% | The gross margin indicates that Clarkson is selling its products for more than the direct costs of making the product. The consistent gross margin shows that Clarkson most likely is able to maintain the cost of its inventory through long term contracts. Clarkson is maintaining a consistent operating margin, and the company’s operating expenses average 21% in sales 1993-1995 with a slight increase to 22.9% in Q1 1996. Other than Q1 1996, Clarkson’s operating expenses as a percentage of sales are in line with other high-profit lumber outlets. Regarding net profit margin, Clarkson is at 2% in 1993-1995, with a decrease to 0% in Q1 1996. The reason for a low net profit margin and lower operating margin in Q1 1996 is due seasonality. A large...
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...Statement of the Problem At first glance, Clarkson Lumber appears to be a healthy company. However, despite rapid growth and increasing sales Clarkson Lumber finds itself searching for additional funding to compensate for a shortage in cash to fund its expanding business. Clarkson Lumber is in this situation for a number of reasons. The company's inability to receive payments from customers in a timely manner created a severe impact in the company's cash flows. The age of account receivables increased each year. In 1995 it took 49 days on average to receive payments from customers. Because of the delay in accounts receivable, Clarkson Lumber's ability to pay suppliers on time is also impacted. In 1995 it took Clarkson 38 days on average to pay its suppliers. Additionally Clarkson Lumber continues to retain increasing amounts of inventory. Inventory as a percent of sales is projected to be 13.5% which lies substantially above industry standards of 12% for low profit outlets and 11.6% for high profit outlets. As a result the company is forced to borrow increasing amounts of debt to reach its anticipated sales of $5.5M in 2006. Reasons for borrowing: • Receivables is a problem, DSO is being stretched by customers so cash inflow goes down • Account payables cannot be cleared as money is stuck in receivables • Inventory conversion period appears to be a factor as well because increasing amounts of inventory is being retained • Interest being charged has increased...
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...Clarkson Lumber Company 1. Clarkson Lumber Company was founded in 1981 and is owned by Keith Clarkson. The company is a retail distributor of lumber products in the growing suburb of the Pacific Northwest. Through competitive pricing and limiting operation expenses, the company has experienced consistent growth and anticipates substantial increases in sales in the coming years. Sales fluctuate to some degree with the health of new housing construction but the company’s high percentage of sales in the repair business have protected the company from economic downturns. Despite the health of the company, Mr. Clarkson is seeking to increase the company’s borrowing. Clarkson Lumber Company is experiencing a shortage of cash as a result of an increase in accounts and notes payable over the last two years. In 1994, Mr. Clarkson bought out his partner, Henry Holtz, for a $200,000 note. The note was to be paid off in 1995 and 1996 and it carried an interest of 11% that consisted of semi-annual payments of $50,000 beginning June 30, 1995. Additionally, Mr. Clarkson was unable to capitalize on purchase discounts of 2%, if the payments were made within 10 days, but luckily suppliers did not seem to mind if payments lagged beyond the 30 day agreement. The buyout of Mr. Holtz and the increase in working capital from expanded sales limited his ability to take purchase discounts and increased his accounts and notes payable. As we can observe from the company’s balance sheet, the total...
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...Clarkson Lumber Company Case : Assignment, Due October 4 1. In your group, assign a Team Administrator, a Notekeeper, and a Number Cruncher(s). These do not need to be independent roles (the Team Spokesperson may be the Number Cruncher, etc.). The other members of the group will contribute their thoughts and ensure that their spokesperson has all the relevant facts to speak for their group. a. The Team Administrator keeps the group on track to ensure that the discussion is on topic without venturing out of scope for this case. The key here is to develop an attractive solution in a relatively short period of time. b. The Notekeeper is capturing the group’s thoughts on paper to be used to develop a cohesive solution. This is very important so that no essential components of dialogue are lost during brainstorming. c. The Number Cruncher(s) will work through financials based on the proposed short-term financing. The financial results produced by this individual(s) will play a predominant role in determining the group’s proposal. You should use your best judgment for projections. 2. The case should be approached in a stand-alone fashion. There is no need to go looking for supporting data. You may make assumptions as appropriate. 3. You will need to: Be prepared to present any portion of the case orally (no need for slides) For the written report, follow this guideline but be sure to organize the report in story...
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...Executive Summary Clarkson Lumber is a small but rapidly growing lumber company in the Pacific Northwest. Keith Clarkson--sole owner and president--anticipates further sales growth but his business may not be able to keep up with future demand because of a shortage of cash, despite good profits. Currently the company has a line of credit with Suburban National Bank, but the bank would not offer any one customer any more than a $400,000 loan, a limit which Clarkson is bumping up against at $399,000 outstanding in the spring of 1996. Staying within the limits requires Clarkson to rely very heavily on trade credits and now Suburban is asking Keith Clarkson to personally guarantee the loan, which puts more risk on him, should the lumber company become insolvent. Therefore, Mr. Clarkson is looking to find another bank with higher lending limits and no personal guarantees to do business with. The task for George Dodge, officer of the larger Northrup National Bank, who is interested in having Clarkson as a client is to investigate Keith Clarkson and his company and determine whether to extend a $750,000 line of credit. Secondary to that is whether $750,000 will be enough to finance the expected expansions, along with the question of what conditions the loan should come with. Our response to whether Clarkson should get the loan is yes, Northrup should approve of Mr. Clarkson’s request for a higher credit line. We also think that $750,000 is a good estimate of the company’s loan...
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...Clarkson Lumber Company Case Assignment : Due Oct 3 1. In your group, assign a Team Administrator, a Notekeeper, and a Number Cruncher(s). These do not need to be independent roles (the Team Spokesperson may be the Number Cruncher, etc.). The other members of the group will contribute their thoughts and ensure that their spokesperson has all the relevant facts to speak for their group. a. The Team Administrator keeps the group on track to ensure that the discussion is on topic without venturing out of scope for this case. The key here is to develop an attractive solution in a relatively short period of time. b. The Notekeeper is capturing the group’s thoughts on paper to be used to develop a cohesive solution. This is very important so that no essential components of dialogue are lost during brainstorming. c. The Number Cruncher(s) will work through financials based on the proposed short-term financing. The financial results produced by this individual(s) will play a predominant role in determining the group’s proposal. You should use your best judgment for projections. 2. The case should be approached in a stand-alone fashion. There is no need to go looking for supporting data. You may make assumptions as appropriate. 3. You will need to: Be prepared to present any portion of the case orally (no need for slides) For the written report, follow this guideline but be sure to organize the report in story format...
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...Finance 725 Spring 2006 J. E. Hodder Corporation Finance Course Schedule Tuesday, January 17: Introduction Thursday, January 19: Clarkson Lumber Company Reading: Note on Financial Analysis a. How is the company's financial performance? (Examine appropriate financial ratios.) b. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? c. How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated? d. How attractive is it to take trade discounts? Tuesday, January 24: Clarkson Lumber Company (continued) Reading: a. Note on Financial Forecasting b. Note on Bank Loans a. How much of a loan will Mr. Clarkson need to finance the expected expansion in sales to $5.5 million in 1996 and to take all the trade discounts? (Prepare a projected income statement for 1996 and a pro forma balance sheet as of December 31, 1996.) b. As Mr. Clarkson’s financial adviser, would you urge him to go ahead with, or to reconsider, his anticipated expansion and plans for additional debt financing? c. As the banker, would you approve Mr. Clarkson’s loan request; and if so, what conditions would you put on the loan? Thursday, January 26: SureCut Shears, Inc. ...
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...Clarkson Lumber Hardwoods, Hard Times BBUS 505a Cavelero, Engstrom, Tobey & Zadah Overview • Case Summary • Problem Identification • Findings • Methodology • Metrics • Insights Case Summary • Clarkson Lumber Company [‘CLC’], is a small PNW lumber concern experiencing rapid, questionably financed growth. • Keith Clarkson [‘Clarkson’], sole owner of CLC, has maxed out ($399K of $400K) his line of credit [‘LOC’] at Suburban National. • CLC relies heavily on trade credit and short term debt. • Clarkson wants to move to Northrup National Bank – a larger bank – with a a $750K short-term LOC. • George Dodge, Northrup officer, is cautiously receptive. He’s asked a team of intelligent, attractive analysts to investigate the current state of CLC. Problem Identification “Clarkson wants to move to Northrup National Bank – a larger bank offering a $750K LOC.” • CLC overuses expensive short-term debt to finance growth and buyout his former partner. • It is our opinion that receiving a larger LOC from our bank will result in negative future growth and exacerbate current cash flow problems. • There are other problems with cash-flow, including inventory purchasing, A/R and a 2% A/P discount (opportunity). • PPE depreciation is an unkown; for our analysis, we factored it out. Findings • CLC can be a profitable investment for Northrup, but not with the stated credit terms. Debt restructuring is needed to maximize CLC’s profitability. • According to our research, CLC is in...
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...COMM 371, Lecture 6 COMM 371, Lecture 6 Lecture 6: Financing Growth – The Clarkson Lumber Case Outline for Today (Clarkson Lumber) • Case objectives • Understand what drives the need for cash: Clarkson needs cash, but has a good record of profitability • Evaluate Clarkson’s loan requirements and ability to repay • Link the short-term financial plan to evaluating the firm’s long-term goals • Practice basic skills in financial analysis • Review facts of case • Construct statement of cash flows • A closer examination of working capital • Analysis of fixed assets • What factors contribute to a need for cash? • Evaluating the “financial strength” of Clarkson • Clarkson’s sustainable growth rate • How much does Clarkson pay for AP financing? • Evaluate Clarkson’s need for bank financing and ability to repay • Long-term strategy Case Facts • Rapid growth in business during recent years (1993-1995). Sales expected to reach $5.5 million in 1996 (+22% vs. previous year) • Profits in 1995 $77 thousands (+13% vs. previous year) • Clarkson is currently at the limit of its current bank borrowing ($400,000) • How quickly has Clarkson’s borrowing escalated? • Bank debt increased from $60 in 1994 to $390 thousands in 1995 • Growth in accounts payable and in notes payable, trade • Why? Buyout: • Clarkson is paying his purchase of Holtz’s stake. • Growth in NWC requirements • So far: forced to forego trade discounts and rely on bank borrowing. Current bank now requires collateral, so explore...
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...Overview Clarkson Lumber Company is a classic example of a privately held company that has experienced a rapid growth in sales and has reached a point where it is facing a shortage of cash to sustain the expected growth in sales in the following years. The owner, Keith Clarkson, bought out his partner’s interest in the company in 1994 for $200,000. His partner, Henry Holtz, took a note for the $200,000 with an interest rate of 11% and was repayable in the semi-annual installments of $50,000 beginning June 30, 1995. The note was taken to give Mr. Clarkson time to arrange for the necessary financing. Mr. Clarkson seems to be running the company well, evident by the constant growth in sales year after year. However, the company is running low on cash on hand, and needs some form of financing to reach the expected sales of 5.5 Million in 1996.Moreover, the borrowing limit set by the Suburban Bank has been reached, prompting the bank to ask Mr. Clarkson to guarantee the loan personally. Mr. Clarkson has been in communication with another bank, Northrup Bank, which might be willing to extend a line of credit of up to $750,000. Analysis There are several reasons for Mr. Clarkson’s need to rely on borrowing despite good profits. Although the profits are good, they are not good enough in our view. The Net Profit Margin has been close to 2% since 1993 (Exhibit D).The cost of goods relative to the sales is high and is keeping the profit margin low. In other words, the costs have...
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...Case Write-up #1 Clarkson Lumber Company Background Clarkson Lumber Company (CLC) is a successful finished wood products company with a promising future, yet needs to apply sound managerial financing policies to continue to be competitive in this market. The sole owner, Keith Clarkson, is dedicated to his profession and has a good reputation among his suppliers and customers. CLC's sales have been consistently growing over the past several years, rising 19% from 1993 to 1994, 30% from 1994 to 1995, and are expected to rise 21.7% in the current year, 1996. The company's products are in demand in the growing Pacific Northwest metropolitan area where they are located and are somewhat protected from the effects of economic downturns in construction because the company's core competencies are associated with the repair business. The NAICS code for CLC is 3219110-wood window and door manufacturing. This industry is comprised of over 1000 firms with a combined revenue of over $8 billion. In order to remain profitable in this industry, a successful firm must rely on efficient manufacturing processes and distribution networks. The company's existing strategy relies heavily on trade credit and short term debt to finance organic growth. CLC’s current lender, Suburban National Bank, will not lend more than $400,000 and the company will not be able to meet expected sales demand without additional financing beyond this amount. Additional funds needed (AFN) is calculated...
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