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Butler Lumber Company Case Study

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Case Study: Butler Lumber Company

Emily Zhao

Concordia University

MBA 508

Submit to

Professor Miolla

On

2/19/2017

Butler Lumber Company is a sole proprietorship company. It mainly sells products such as plywood, moldings, and sash and door products. In 1991, the company anticipated a positive increase in sales. Currently, there is a cash shortage of $247,000. Due to the cash shortage, Butler faced two potential loan orders from Suburban National Bank and Northrop National Bank. Suburban National Bank, who had been a partner with Butler Lumber Company, offered a $250,000 loan, asking Butler to secure the loan with its real estate property. Northrop National Bank could potentially offer Butler $465,000 without securing property, but is still considering the risk through financial analysis.

There are two arguments in this case:

  1. From Butler Lumber’s perspective, which bank to work with.
  2. From Northrop National Bank’s perspective, to loan money to Butler or not.

According to Tim Berry (2017), one of the most important things banks ask before granting a loan are key ratios: quick ratio, current ratio, and return on equity are the crucial metrics.  

Refer to Butler’s current ratio below:

Year 

1988

1989

1990

Current assets

468

596

776

Current liabilities

260

375

535

Current Ratio

1.8

1.589333

1.450467

“A higher current ratio indicates a greater degree of liquidity.”  (Gitman, 2015, p66). There is not enough data to calculate 1991’s current ratio because the balance sheets only provide the first quarter of 1991. The historical data shows that the current ratio is decreasing, Bulter might have a difficult time to meet its short term obligations.

Refer to Butler’s quick ratio below:

Year

1988

1989

1990

Current asset

468

326

418

Inventory

239

596

776

Current liabilities

260

375

535

Quick ratio

0.880769

-0.72

-0.67

When Northrop National Bank takes a closer look at Bulter Lumber Company’s inventory, it shows the ending inventory of 1990 and 1991 are way higher than 1988. This means Butler could not effectively turn inventory to cash. The case mentions that Butler Lumber Company anticipated a substantial increase in sales in 1991, so Northrop National Bank should dig into how Butler plans to turn inventory.

Gross profit margin ratio is also an important element to look at. It shows the percentage of each sales dollar remaining after the firm has paid for its goods (Gitman, 2015, P75).

Refer to gross profit margin ratio below:

 

1988

1989

1990

Gross profits

475

576

744

Sales

1697

2013

2694

Gross profit margin

28%

29%

28%

Since the higher the gross profit margin the better, Butler is not showing a high profit margin rate. This is another potential risk factor for Northrop National Bank.

Although there are some other things Northrop National Bank needs to evaluate before making the lending decision, these crucial ratios show that lending money to Butler may not be the right choice. The financial statement shows that Butler is not a big company- $465,000 is too much for a company of Butler’s size.

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