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Butler Lumber Case Study

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Category: Business

Autor: anton 25 June 2011

Words: 551 | Pages: 3

The maximum loan that the Butler Lumber Company (BLC) could obtain

from Suburban National was $250,000 in which his property would be

used to secure the loan. Northrop National Bank offered BLC a line of

credit of up to $465,000. BLC would have to sever ties with Suburban

National if they were to have this LOC extended to them.

As Mr. Butlers financial advisor, I would advise him to take the loan in an

attempt to grow the business. One alarming fact about his business is

the lack of a sales staff, yet the revenue has been able to grow at a fast

pace; 18% in 1989, 34% in 1990, 19% in 1991. By adding another an

experienced salesman that is working for a base salary plus

commission, they can grow the revenues even more. By having this

person work on commission, this will eat into the profit margin for the

materials he is selling. But the net impact to the BLC will be positive. I

would advise Mr. Butler to select the LOC for up to $465,000 because he

can take out as little as he needs. He does not need all $465,000 this

quarter, but he may need some in the first and last quarters of the year

because he obtains 55% of his revenues in the second and third

quarters. So it is strategically important for him to have access to this

capital because of the nature of his cyclical business.

As a banker, I would not grant BLC a LOC for $465,000. This is too much for a company this size, and with such little equity. The bank

is too aggressive with its forecast that BLC will have revenues of $3.6 million in 1991. I believe I am aggressive in forecasting they will

have $3.2 million in revenue in 1991, $400,000 less than what the bank forecasted. I came up with $3.2m by taking the 1st quarter

revenue of $718,000 which is historically approximately 22.5% of the yearly revenue. Assuming this holds true again in 1991, the annual

revenue in 1991 will be around $3.2m. This is a 19% year over year increase in revenue for BLC, which is inline with their year over year

growth in 1989, and less than the 34% in the best year, 1990.

The margins are not great for this industry, and BLC is no exception. Even with the excellent year over year growth in revenues for this

company, BLC is on pace for another dismal year of net income in the high $40k. The net income for this company has been constant;

$31k in 1988, $34k in 1989, $44k in 1990, and an estimated $49k in 1991. Net income of this size should not warrant extending a line

of credit to this company. As the banker, I would not grant a LOC or any other type of loan this size. I would consider granting this

company a smaller LOC with the similar stipulations of maintaining an appropriate working capital amount, fixed asset purchases

would need bank approval and that Butler would put up personal property and his insurance policy as collateral for the loans that the

business takes.

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