Clarkson Lumber Case Analysis

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.

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 1995 Clarkson Lumber could no longer take advantage of trade discounts and increased its debt to $390,000. Forgoing the trade discounts resulted in Clarkson Lumber not receiving a discount of $88,000 in inventory purchases of $4.4M.

The financial strength of the company is deteriorating due to the following:

 Increasing inventory to sales ratio

 Increasing accounts receivable to sales ratio

 Declining profit margins

 Inability to take advantage of trade discounts

To forecast Clarkson Lumber's 1996 pro forma statements, we examined past key ratios for assets and liabilities from the last three years. We expressed these ratios as a percentage of sales to identify important trends and forecasted forward for 1996. We noticed the following financial health indicators in our forecast: Clarkson Lumber's ratio of total assets to sales is moving from a position in line with high profit outlets to low profit outlets at 37.7%. This is due to accounts receivable increasing to 14% of sales which is higher than the 13.7% experienced by low profit ratios. Also, inventory as a percentage of sales has steadily increased from 11.5% in 1993 to 13.5% in 1996.

In order to expand and remain financially stable, Clarkson Lumber must take advantage of all trade discounts. Exhibits A-1 & A-2 compares the impact to net income with and without the trade discounts.

In conclusion Clarkson Lumber would need an estimated $833,000 in additional financing as shown in exhibit B-2. Therefore, Clarkson Lumber

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