Assignment 3

Jayesh Kukreti
063 Y

Butler Lumber Company

Objective: A short report as a credit officer of the bank processing the loan application of Butler
Lumber Company, granting the loan or rejecting it with reasons.
Key highlights about the company:

Founded in 1981
Mark Butler and his brother in law stark
Butler bought back the share and incorporated the company in 1988
Funded by a bank loan of 70000, to be repaid in 10 instalments
Business model: Procure lumber products at a discount by procuring in bulk and sell at a margin

The critical success factors:

Bulk procurement at a discount
Competitive pricing
Control of operating expenses

Key points of financial analysis of the company:

Increase in annual sales and profit: Annual sales of $1,697,000 in 1988, $2,013,000 in 1989, and
$2,694,000 in 1990 yielded after tax profits of $31,000 in 1988, $34,000 in 1989, and $44,000 in 1990.
Rapid increase in receivables and inventory have been responsible
Payment to Mr. Stark
Retained earnings provide only 16% of the funds needed
Major source has been trade credit and bank borrowing
Debt and current ratio is of concern
Increase in accounts and notes payable
Good sales prospects
Expected sales 3.6 million

Cost V/S Benefits

Consider average payable days of 46
Consider 2 percent discount if paid within 10 days
Additional cost of foregoing 2% trade discount

Assume a purchase of Rs.1000

He can pay either 980 in 10 days or 1000 in 46 days
In essence, the supplier is charging 20 for using 980 for 36 days
2.04 % for 36 days and 20.7% annually (approximately)

Anooj Mehta | X 024 | FSA | IFMR B 17

Assumptions:

Two scenarios
With additional bank credit Mr. Butler will reduce his payables period to 10 days
Mr. Butler pays in 46 days
Sales volume for 1991 will be 3.6 million
All purchase discounts will be taken for the period April 1 to December 1991

Issues

Company expanding rapidly

Increase in working capital requirements have outrun the capacity of the company to generate
funds from internal sources

Conclusion
Mr. Butler will need a much larger credit from the bank if he has to take advantage of the discount
The alternatives for Mr. Butler
Negotiate a larger volume of credit
Slow down the projected rate of expansion
Rely more on trade credit (46 days)
Continued expansion at a rate that cannot be financed proportionately from retained earnings will leave
Butler in a more vulnerable financial position and obviously will be high risk policy.
The bank has agreed to give a revolving secured short term 90 day note not to exceed $465,000 on a lien on
inventory and accounts receivables. But for long term borrowing bank has put up some restrictions that has to be
fulfilled by the company to get additional borrowings:

Maintain net working capital at a certain level

Additional investments in fixed assets only with bank's permission
Limitations on the fund withdrawal from banks
Interest would be
set on a floating-rate basis at 2 percentage points above the prime rate
Interest rate is expected to be 10.5%

Jayesh Kukreti| 063 Section - Y | FSA | IFMR B 17