ANALYSIS

Determining does Mr. Butler need or not in additional funding to face increasing in sales and to expand
his business must be analyze carefully. If we see from the income statement through 1988 to 1990, Butler
Lumber Company always increases in sales and net income. And if we examine from the balance sheet,
the asset of the company also increases during 1988 to 1990. Balancing the increasing of the assets, Butler
Lumber Company gets it from the increasing of the liability and the net worth gradually. So if we just see
from this condition, we will conclude that the company is growing from year to year. But to decide is the
company growing well or not, we have to explore in detail with the company financial statements and
then answer the question of Mr. Butler, is the company need to borrow more money, and give
recommendations as his financial advisor.

Company Cash Flow

From the balance sheet, year to year, the cash of the company always decrease although the profit is
positive. It indicates that the company use cash whether to use it in operating activities, investing activities
or financing activities.

The first thing that we should examine in the company cash flow is net cash flow provided by operating
expenses. If we look at the net cash flow by operating activities in 1989, 1990 and first quarter of 1991,
all of the values are negative. This indicates bad condition in managing cash flow from the company. If it
happens year to year after, it will make the company in default condition in the future because there is
no cash to pay the debt.

We would like to analyze why the cash always decrease. Is it good or not? Was the cash been invested
giving value added to the company?
First, we see from the operating activities. The account receivable and inventories from 1988 until 1st
quarter of 1991 increases every year. The increasing of inventories and account receivable is acceptable
if the companys sales grow. But we should examine, does the growth reasonable or not. Do the
inventories grow more because the goods are not sold or indeed it needs a lot of stock in order to serve
customers better?

Based on the information, Butler Lumber Company is a retail distributor company. So it fixed assets mostly
used for office and warehouse. Usually inventory growth for retails company is constant ratio or even
declining ratio due to the concept of economies of scale. So to evaluate, we would like to examine the
growth ratio of Butlers inventory.

$350.00

$300.00

$250.00

$200.00 Real Inventory per Sales

$150.00 Constant Ratio Based on

1988
$100.00

$50.00

$-
$1,600.00 $2,100.00 $2,600.00

If we see the graph, the inventory ratio from 1988 to 1st quarter of 1999 is curve-linier. From year to year
the inventories always increase. Based on economies of scale theory, the inventory ratio should decrease
or at least constant. So actually from this condition, Butler inventory increase because many goods of
them arent sold. There are too many stocks in the warehouse.

The Account Receivable ratio to sales from 1988 to 1990 also increase from 10,08% to 11,77%. So the
Butler Company doesnt manage the account receivable well which causes shortage of cash.

Second, we see from the investing activities. Every year, Butler always invest in fixed asset to support their
sales growth.
Third, we see from the financing activities. Each year, butler company always add debt from the bank.

Days Sales Outstanding of Butler Lumber Company

DSO represents the average length of time that the company must wait after making a sale before
receiving cash. From year to year, DSO increased and the Butlers customer paid more than 30 days. It is
not a good management in managing account receivable.

Days Sales Outstanding of Butler Lumber Companys Supplier Point of View

Despite a discount of 2% for payments made within 10 days of the invoice date, we have to examine the
payment of Butler Lumber Company to the supplier. We call it as DSO from the point of view of Butler
Lumber Companys Supplier.

From 1988, DSO Butlers Supplier is more than 30 days. The suppliers term to get 2% discount is the
payment made within 10 days of invoice date. So, Butler from 1988 to 1990 never get discount from the
supplier because the payment made more than 10 days. Even the payment was made more than the max
days of suppliers term, 30 days.

The average Butler purchase to supplier per month from 1988 to 1990 is $ 134.56. If Butler has a cash to
pay less than 10 days, they will get 2% discount. So the COGS will be decrease. If they get money from the
bank with 10,5% interest per year, they will get 13,5% profit from the cash received from the bank.