Gilbert Lumber Company – Analysis

Gilbert Lumber Company – Analysis

Alternatives

• Lower Debt

• Use A/R discount to increase cash flow

• Take more supplier discounts and transfer the savings towards a/r discounts for customers to increase cashflows

• Reduce Salary

• Khai Loan

• Maximum of 465,000
• Flexibility of a line of credit
• 90 day revolving note

• Restrictions on additional borrowing
• Net working capital would be maintained at an agreed level
• Additional investment in fixed assets could be made only with prior approval
• Limitations on Gilbert’s ability to withdraw funds

• 2% above f=prime rate starting at 10.5%

• Ferryn Loan

• 247,000 out of 250,000 has been used up
• Bank is looking to have the loan secured with real property

Note: Quantity discounts and net credit terms were usually offered to customers

Recommendation:

It is recommended to take the line of credit given that the greater credit limit is necessary under the company’s current growth strategy.

• EFN is projected to be an addition $417,000 under the assumption that GL keeps the Flynn loan at $247,000 but since the company is forced to relinquish the loan, EFN is actually $644,000

• EFN is $644,000 in the situation where the company takes advantage of all the supplier discounts and always pays off A/P and Trade Receivables in 10 days

• Unrealistic in model b so instead only pay off trade receivables in model a (not shown in Excel since only appears in first quarter 2014)

• In Model A, the EFN decreases to $411,000 which is a more manageable number

• Model A is then altered to v3 which increases the credit discount program for its customers (see below)

• Effective interest rate if the 2% discount is foregone is 37.2% annually. Therefore, it is better to borrow using the line of credit (10.5% p.a.) and lower financing costs for the company.

Benefits of the Khai National Bank Line of Credit

• Flexibility of a line of credit
• Higher credit limit gives ample room for the company to grow
• Loan is not secured with fixed assets

Disadvantages of the Khai National Bank Line of Credit

• Restrictions on Gilbert’s ability to seek additional financing
• There is a pressure to maintain net working capital at a certain level
• Restrictions on Gilbert’s ability to invest additionally

• This is not a main concern for Gilbert since he is said to operate the business in a conservative manner without investing in fixed assets in a disproportionate way

• Restrictions on Gilbert’s ability to withdraw funds

• This can be a concern for the owner given that he has been paying increasing salaries to himself year over year

It is recommended that the lumber company implements a credit discount for its customers.

• Despite growing sales, the company has been experiencing increasing liabilities and decreasing cash stores.
• By implementing a credit discount for its customers, the firm will be able to convert more of its receivables into cash which can be used to pay out suppliers and take advantage of the supplier credit discounts. In our predictions, we project a conversion of $200,000 of A/R into cash.
• Increasing cashflows for the company is advantageous in the long run in order to lower financing costs for the company.
• The savings for the financing costs and the supplier discounts can be used for these credit discounts for the customers.

Ratio Improvements

• Quick Ratio: The ratio actually worsened given that the company was leveraged higher. We don’t believe that this is a concern since our current ratio increased 1.2% from 2013 to 2014.
• D/E ratio decreased due to lowered A/P from improved cashflows (from 1.68 to 1.43)
• Profitability improved given the ability to take the supplier discount benefit as a result of improved cashflows which also led to an increase in the net profit margin