Clarkson Case

Clarkson Lumber Company (CLC) has enjoyed rapid growth in sales over recent years and is expecting to see that continued growth carry into the spring of 1996 where sales are expected to reach $5.5 million. Despite the increase in sales and good profits the company is seeing a shortage in cash. In 1994 the owner of the company, Mr. Clarkson, bought out his partner's interest in the company for $200,000. The note for the $200,000 carried an interest rate of 11% and was being repaid with semi-annual payments of $50,000 beginning June 30, 1995. Mr. Clarkson had reached the borrowing limit with the Suburban National Bank (SNB) with his recent loan of $399,000 (11% interest rate) and the bank is now requesting Mr. Clarkson to personally guarantee the loan. Mr. Clarkson was offered a $750,000 loan with a 90-day note and 11% interest rate from Northup National Bank (NNB) without having to personally guarantee the loan. As part of the agreement Mr. Clarkson would have to sever all relationships and loans with SNB. This case analysis will analyze whether Mr. Clarkson should accept the loan from Northup National Bank and what are the potential outcomes from accepting the loan or accepting alternatives solutions.

CLC has been successful in its sales growth by keeping low operating costs and buying inventory in quantities for discounted rates. Despite this efficient management Mr. Clarkson needs to take a close look at CLC's operational performance. The CLC current ratio has drastically declined from 1993-1995 due to continued increase in liabilities with short-term loans from the bank and the buyout of Mr. Holtz. In 1995 the current ratio of CLC was 1.15, far below the bottom 25% of the industry standard of 1.31. This lack of liquidity freezes up all available cash. Due to buying inventory in bulk to receive discounts the quantity of inventory held at the end of each year has increased from 1993-1995. In 1995 the inventory turnover rate was 7.70, which is significantly below the high-outlet industry average of 11.60. The most alarming of concerns for CLC is the poor management of Accounts Receivables (AR). The CLC average number of days to collect payment after a sale rose to almost 49 days in 1995. The industry average is between 11-12 days, which means that the CLC is providing their customers and vendors with an interest free loan for over 25 days. This lag in payments received prevents the CLC from using that cash to pay their bills in ten days and receive trade discounts. Assuming trade discounts are taken in the last six months of 1996 the CLC can expect savings of over $40,000 from trade discounts. (See Exhibit 2 for paragraph)

From 1993-1995 the CLC relied on short-term high interest loans from SNB to finance its operations. Though CLC has seen an increase in sales from 1993-1995 the profitability of the company has grown at a marginal rate. The rise in cost of goods due to the increased quantity of inventory purchased