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 do that is an added expense
• A new expenditure is also about to come up in the form of semi annual payment to Mr. Holtz from 30 June, 1995
Financial Analysis
Until recently, Clarkson Lumber met its financing needs through various means. Clarkson Lumber maintained low operating expenses, leveraged trade credits and maintained a bank note with Suburban National for $399,000. In
