M12-S2 - Case - Clarkson Lumber Company

Answer the following questions on the

Clarkson Lumber Company

case:

1) How did clarcon finance his business in the past? 1) Retained earnings

• Loan from Holtz (not paying duties)

2) Trade credit

• Increased supplier credit

3) Bank credit

• • Yearly loans from the bank from 1994 to 1996

2) Is this a profitable business? 3) Compute the average Cash conversion cycle for the company? 4) Prepare a loan estimate for the end of 1996 using a projected income statement and balance sheet 5) Calculate the debt ratio (total debt / assets, current and quick ratio as the banker is concerned about the firms liquidity 6) As a banker would you approve te loan? Only under the condition that:

• You bring down the Average collection period to ~40 days
• You increase the # days suppliers credit to ~45 days
• Bring down the cash conversion cycle

7) What would be your advice?

Inventory / Cost of Good sold

1. days inventories: ${\frac {(Inventory\ begin\ -\ Inventory\ end)/2}{Cost\ of\ Goods\ Sold}}$
2. days accounts payable (average collection period (ACP): ${\frac {accounts\ receivable}{sales}}*360$
3. days suppliers credit: ${\frac {accounts\ payable}{purchases}}*360$

Very important question cash conversion cycle: how many days do you need to finance the difference between the accounts receivable and accounts payable?

See

this

spreadsheet for some of the calculations in the case.