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Butler Lumber Company Outline:

Summary of Facts:

Problem:

Analysis:
o Why is the company experiencing cash shortage in light of growing
revenue?
Ratio analysis
Liquidity Ratios:
o Determines Butler Lumbers companys ability to
meet its short-term obligations to suppliers and
debt holders. Provides a good indication of
whether the company can support its operating
expenses given its rapidly expanding business,
implications for obligations and operations. But
remember you cant pay bills with working
capital, you pay bills with cash, so there can be
misleading.
o Current Ratio: Butler lumbers company is seeing
a decreasing current ratio and 1.6 ratio average
over the 3-year period.
Not a great number. Decreasing may
imply unable to keep up with growth.
Going further than above CCC Cycle:
o Here we are looking at mgmt. of working capital
asset and again the ability to pay off short term
liabilitites.
o How often does butler lumber turn its inventory
into sales, and sales into cash, which in turn used
to payoff suppliers?
o For Butler Lumber we see a longer duration of
inventory on hand over the 3 years. This is also
in light of a longer average collection of
receivables over the same time period. Cash is
being tied up in inventory and receivables, and
as a result its obligations to suppliers suffer
hence the bank 1s demand for collateral.
o Breaking it down:
Rising DIO points to the growth of the
business and the need to meet new
demand.

Receivables and payables information Relationship
with suppliers and its customers
Look @ interest expenses and servicing of debt costs
and see if thats hurting them.
Trace cash flows:
Cash flows from operations
Sources and uses of funds.
Cash-tocash cycle?
o Whats the companies sustainable growth rate, what does their
growth rate imply about the need for external financing?