accessing financial futures

7/29/2019 Accessing financial futures

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ASSESSING FIRMS FUTURE FINANCIAL

REQUIREMENTSA case study on

Butler Lumber Co.

Presented By: Group 1

Abhijit Chakravarty Roll No. 12PGPWE001Abhishek Agrawal Roll No.12PGPWE002

Abhishek Pruthi Roll No.12PGPWE003

Anu Ranjan Roll No.12PGPWE004

Anurag Rao Roll No.12PGPWE006

Anil Kumar Bhardwaj Roll No.12PGPWE005

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FINANCING NEEDS: WHY?

External Financing Needs

FutureRevenues

FinancialRatios

SalesOutlook

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CASE SYNOPSIS

Butler Lumber Company

A growing profitable business with projectedsubstantial increase in its level of activities hasexhausted its credit limit of $ 2,50,000/-.

The company is now considering to go forenhancement in its credit facilities by raising itscredit limit to $ 4,65,000/- by switching to anotherbank.

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BACKGROUND

Butler Lumber Company

Incorporated with Mark Butler and Henry Stark as partners.

Products included plywood, mouldings, sash and door products.

Did business of retail distribution in local area.

Mark Butler bought out Henry Starks share for $ 1,05,000/-, financedby loan of $ 70,000/- carrying interest of 11%, repayable in quarterlyinstalments of $ 7,000/- for next 10 years.

Company was experiencing shortage of cash and wanted to increaseborrowings which presently is $ 247,000 from Suburban Bank.

Butler Contacts Northrop Bank which tentatively agrees to lendsecured 90 day note not exceeding $ 465,000 at an interest of10.5%.

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OPERATIONSTRATEGYOF BUTLER LUMBERCO.

Price Competition

Control of operating expenses

Quantity purchase of materials

No salesmen i.e. all orders taken on phone Products sold mainly used for repair work.

55% sales during period April to Sept.

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TRADE TERMSOF BUTLER LUMBER

To customers:

Quantity discounts

Credit terms of net 30 days

From Vendors

2% discounts if payment made within 10 days

All accounts became due in 30 days

During last two years, the company had notavailed purchase discounts because of shortageof funds.

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THEKEYISSUESFACINGITARE:

Need for additional funds to expand

Improve cash flexibility

Need to consolidate debt

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OPERATING STATEMENTS

1988 1989 1990 1991 Q1

1991

Projections

Net Sales1697 2013 2694 718 3600

CoGS Op. Inventory 183 239 326 418 418

Purchases 1278 1524 2042 660 2722

1461 1763 2368 1078 3140

Clo. Inventory 239 326 418 556 551

Total COGS 1222 1437 1950 522 2589

Gross Profit 475 576 744 196 1011

Operating Expenses 425 515 658 175 901

PBIT 50 61 86 21 110

Interest Expenses 13 20 33 10 48

PBT 37 41 53 11 62

Prov. For Taxes 6 7 9 2 11

PAT 31 34 44 9 51

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Balance Sheet 1988 1989 1990 1991 Q1 1991(Proj)

Cash 58 48 41 31 55

AR 171 222 317 345 424

Inventory 239 326 418 556 559

Total CA 468 596 776 932 1037

FA 126 140 157 162 210

Total Assets 594 736 933 1094 1247

Notes Payable to Bank 0 146 233 247 403

Notes Payable to Stark 105 0 0 0 0

Notes Payable for Trade 0 0 0 157 0

Accounts Payable 124 192 256 243 342

Accrued Expenses 24 30 3936

52Long Term Debts in next 12m 7 7 7 7 7

Total Current Liabilities 260 375 535 690 804

Long Term Debts 64 57 50 47 43

Capital / Net Worth 270 304 348 357 400

Total Liabilities 594 736 933 1094 1247

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INVIGILATORS QUESTIONS

Why does Mr. Butler have to borrow so much money tosupport this profitable business?

Do you agree with his estimate of the companys loan

requirements? How much will be need to borrow tofinance his expected expansion in sales (assume a 1991sales volume of $3.6 million)?

As Mr. Butlers financial adviser, would you urge him to

go ahead with, or to reconsider, his anticipated expansionand his plans for additional debt financing? As thebanker, would you approve Mr. Butlers loan request,and, if so, what conditions would you put on the loan?

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TOOLS USEDFORARRIVINGATRECOMMENDATION

Review of Financial Performance

Fund Flow Statements

Ratio Analysis Trend Analysis

SWOT Analysis

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FINANCIAL HIGHLIGHTS: LIQUIDITY:

Cash has been decreasing from 1988 till 1990. However, it isprojected to increase to $55K for FY 1991.

Current ratio, quick ratio and cash ratio have been decreasingthroughout the year (Indicating lower liquidity).

COLLECTION AND PAYMENT PERIOD:

Average Collection Period Days during the last 3 years haveremained around 36 days as against Average Payment Period Daysof around 38 days.

INVENTORY TURNOVER: Days in inventory during the last 3 years have remained around 71

days. However, the same in projected to be around 68 days.

LONG TERM DEBTS: Interest of Stark's was bought in 1988 with long term loans.

INTEREST PAYMENTS: Interest expenses have been increasing (times interest earned

decreased from 3.846 in 1988 to 2.606 in 1990)12


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FUND FLOW STATEMENT1989 1990 1991

1 SOURCES

Net Profit (after tax ) 34 44 52

Increase in Capital 34 44 52TOTAL 68 88 104

2 USES

Decrease in Term Liabilities 112 7 7

Increase in Fixed Assets 14 17 53

TOTAL 126 24 60

3 Long Term Surplus / Deficit -58 64 444 Increase / Decrease in Current Assets * 128 180 253

5 Increase / Decrease in Current Liabilities 74 73 99

6 Increase / Decrease in Working Capital Gap 54 107 154

7 Net Surplus ( + ) / ( - ) -112 -43 -110

8 Increase / Decrease in Bank Borrowings 146 87 170

INCREASE / DECREASE IN NET SALES 316 681 906

* Break - up of ( 4 )

Increase / Decrease in Finished goods 87 92 133

Increase / Decrease in Receivables 51 95 107

Increase / Decrease in Other Current Assets -10 -7 13

Total 128 180 253

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FINANCIALHEALTHASSESSMENTTOOLS

ProfitabilityRatios

Net profitmargin

Return onEquity

Gross Profit

Ratio

Activity Ratios

Sales toAsset Ratio

ReceivablesTurnover

Inventory

TurnoverRatio

LeverageRatios

Debt Ratio Times

InterestEarned Ratio

No of Days

Payables

LiquidityRatios

CurrentRatio

Quick Ratio

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PROFITABILITY RATIOS

27.991% 28.614% 27.617% 27.298%

2.539% 2.683% 2.858% 2.646%0.000%

5.000%

10.000%15.000%

20.000%

25.000%

30.000%

35.000%

40.000%

45.000%

50.000%

1988 1989 1990 1991Q1

GP RATIO

NP MARGIN

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ACTIVITY RATIOS

2.857 3.027 3.228 2.834

5.113 5.087 5.242

4.287

9.92410.244 9.996

8.677

10.3069.646

9.116

8.049

0

2

4

6

8

10

12

1988 1989 1990 1991Q1

SAR

IT

RT

PT

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LEVERAGE RATIOS

0.192 0.158 0.126 0.116

3.846

3.052.606

2.1

0.395 0.409 0.455 0.457

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

1988 1989 1990 1991Q1

DEBT RATIO

TIMES INT EAR

DEBT RATIO INC

ST

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LIQUIDITY RATIOS

1.8

1.589

1.45

1.351

0.881

0.72 0.669

0.545

0

0.2

0.40.6

0.8

1

1.2

1.4

1.6

1.8

2

1988 1989 1990 1991Q1

CR

QR

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SWOT ANALYSIS

Positive image amongst itscustomers

Conservative in operations

Highly centralised model ofmanagement

Poor Liquidity and efficiencyratios

Control over operatingexpenses

Demand relativelyprotected from economicfluctuations

Strength Weakness

OpportuntiesThreats

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NEED FOR BORROWING MONEY??

Cash tied up with inventory Can be improved by working

on receivables turnover ratio

Shortage ofCash

Loan of $70,000 @ 11%interest compounded to cashshortage problem

DebtConsolidation

Additional investments inworking capital and inventorieswill be required to meet thesales volume

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HOW MUCH TO BORROW??

Assuming 1991 sales volume of $3.6 millioncompanys loan estimation is overstated

Loan of $ 403,000 will be sufficient for sales volume

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SUGGESTIONS AS A FINANCIALADVISOR

Sales growth of 33.63% in 1991 over 1990 to $3.6million is tenable

Additional cash for inventories and working capitalis required to meet the sales

Go ahead for getting anextended line of credit!!

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BANKERS PERSPECTIVE

As Bankers we would not approve the loan of $465K, rather we would approve the loan of $403K.

The same is based on the projections of 1991.

Conditions of Sanction:

The Company will improve its Net Working Capital to Total AssetRatio in addition to improving the Current, Quick and Cash Ratioby induction of fresh capital

The Company will resort to better management of inventory,

account receivable in order to ensure sufficient liquidity

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Thank You

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