The Butler Lumber Co. is looking into taking out a bank loan for business expansion. This case study provides students the opportunity to look into the financial statements of a company and prepare financial forecasting and analyze the same.
Thomas R. Piper
Harvard Business Review (292013-PDF-ENG)
October 31, 1991
Case questions answered:
- Why does Mr. Butler have to borrow so much money to support this profitable business?
- Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)?
- As Mr. Butler’s financial adviser, would you urge him to go ahead with, or to reconsider his anticipated expansion and his plans for additional debt financing?
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Case answers for Butler Lumber Co.
This case solution includes an Excel file with calculations.
Financial Statements for Butler Lumber Co.
The following FINANCIAL STATEMENTS include our 1991 forecast for Butler Lumber Co.
Funds Flow Statement
1. Why does Mr. Butler have to borrow so much money to support this profitable business?
Mr. Buttler wants to expand his business. For the expansion of the company, he needs extra funding to support his business operation.
Current sources of funding are coming from Bank Borrowing (49%) and Note Payables (28%), but his cash is tied up in Inventories (38%) and in Accounts Receivables (31%).
Furthermore, he bought out his partner Mr. Stark. By doing this, he incurred an additional cash outflow of 105k (22%).
Besides the fact that he is expanding the business, we have to see whether he is running the business efficiently.
Regarding his inventory management, we see a decreasing inventory turnover since 1988, which means that his inventory for Butler Lumber Co. is piling up. We know, however, this might be partially due to the fact that he is taking advantage of discounts on bulk purchases. This implies that there is a…