Case Study: Capital Spending budget
Butler Wood Company
Butler Timber Company, a lumber dealer with a quick growth rate, is facing the problem of money flow lack. In order to support this successful business, BLC needs a great amount of cash. The loan of $250, 000 from Suburban National and a line of credit of up to $465, 500 from Northrop National Bank are the two choices provided. After a short review of the operation and financial conditions of BLC, we first make research of the credit level of BLC from the point of view of company. Although the responses from each of the firms that had business dealings with Butler are quite positive, equally solvency and liquidity condition and the mortgage loan indicates that it can be not a good option for Northrop National Lender to offer a credit line to BLC. Then we all diagnose the organization of BLC by examining the resources and uses of cash and find out the increase in products on hand and accounts payable uses up too much money that leads to the shortage of cash flow. If BLC can make improvement in the management of these two items, absolutely it can take advantage of the control discount, which usually equals to home finance loan of twenty. 2% each year. Based on the calculation of average times payable price cut it can be concluded that BLC should reduce their days payable outstanding to 10 days. As sales is usually expected to reach $3. 6th million 20 years ago, the forecasted income bed sheet and the "balance sheet" can be obtained through calculation in order that we get the plug worth (notes payable to bank) needed for the profitable organization. This amount is so large that it exceeds the maximum sum the company could get from financial institution.
In the third part of this report, you can expect four recommendations for BLC to fix the problem of cash flow lack. The credit terms of net thirty days on wide open account wanted to customers may be improved by simply Customer Credit score System. Besides BLC ought to maintain inventory at an optimal level so that if perhaps can save the ability cost of living in funds. The next suggestion we provide is concerned with cash management. Accelerating money inflow and controlling funds outflow are two main means to decrease the opportunity expense of holding funds. We as well suggest BLC to finance through value so that the responsibility rate could be reduced to a relatively low-level.
Key Words: capital budgeting,
1 . History 1
2 . Perspective of Banker two
2 . 1 Customary investigation-qualification of the owner 2
2 . 2 Financial analysis two
2 . 1 . 3 Operating management four
2 . 1 ) 4 Resources condition used for securing four
2 . 2 Summary a few
3 Point of view of Retainer 6
3. 1 Options and uses of cash 6
three or more. 2 Expense of trade lower price 7
three or more. 3 Forecasted Income assertions for 1991 8
three or more. 4 Expected Balance sheet for 1991 twelve
4 Recommendation 12
5. 1 Accounts Receivable Managing 12
some. 2 Downscale Inventory doze
4. three or more Cash Administration 12
some. 4 Equity Financing 13
5 Realization 14
1 . Background
Being a full assistance building materials dealer offering the requires of sector, contractors, builders and homeowners, Butler Timber Company is in the process of speedy growth. About 55% of total sales were made by April to September, and repair business accounts a high amount. In order to support this lucrative business, BLC needs a great amount of cash.
The most loan the Butler Lumber Company (BLC) could obtain from Suburban National was $250, 1000 in which his property would be used to secure the loan. Northrop National Lender offered BLC a line of credit of up to $465, 000 numerous restrictions. BLC would have to sever ties with Suburban Nationwide if we were holding to have this LOC prolonged to all of them.
2 . Point of view of Banker
From the point of view of banker, it is quite affordable for Northrop National Lender to put limitations on the line of credit provided to the Butler Lumber Firm. From the investigation carried by the credit office, we can discover several take into account support our logic.
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