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    Assignment 3: Jayesh Kukreti 63 - Y

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    Jayesh Kukreti
    This document is a report from a credit officer analyzing Butler Lumber Company's loan application. It summarizes the company's history and financials. Sales and profits have increased annually since 1988. However, receivables and inventory have rapidly increased as well. The company is expanding quickly but working capital needs are outpacing internal funding sources. The credit officer concludes that to take full advantage of supplier discounts and continue expanding, Mr. Butler will need a larger credit line from the bank. The bank agrees to a $465,000 revolving secured short-term loan but requires certain financial conditions are met for additional long-term borrowing.

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    Assignment 3: Jayesh Kukreti 63 - Y

    Uploaded by

    Jayesh Kukreti
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    This document is a report from a credit officer analyzing Butler Lumber Company's loan application. It summarizes the company's history and financials. Sales and profits have increased annually since 1988. However, receivables and inventory have rapidly increased as well. The company is expanding quickly but working capital needs are outpacing internal funding sources. The credit officer concludes that to take full advantage of supplier discounts and continue expanding, Mr. Butler will need a larger credit line from the bank. The bank agrees to a $465,000 revolving secured short-term loan but requires certain financial conditions are met for additional long-term borrowing.

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    FSA 3

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    This document is a report from a credit officer analyzing Butler Lumber Company's loan application. It summarizes the company's history and financials. Sales and profits have increased annually since 1988. However, receivables and inventory have rapidly increased as well. The company is expanding quickly but working capital needs are outpacing internal funding sources. The credit officer concludes that to take full advantage of supplier discounts and continue expanding, Mr. Butler will need a larger credit line from the bank. The bank agrees to a $465,000 revolving secured short-term loan but requires certain financial conditions are met for additional long-term borrowing.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    20 views2 pages

    Assignment 3: Jayesh Kukreti 63 - Y

    Uploaded by

    Jayesh Kukreti
    This document is a report from a credit officer analyzing Butler Lumber Company's loan application. It summarizes the company's history and financials. Sales and profits have increased annually since 1988. However, receivables and inventory have rapidly increased as well. The company is expanding quickly but working capital needs are outpacing internal funding sources. The credit officer concludes that to take full advantage of supplier discounts and continue expanding, Mr. Butler will need a larger credit line from the bank. The bank agrees to a $465,000 revolving secured short-term loan but requires certain financial conditions are met for additional long-term borrowing.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    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

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