Financial Management: Analysis of Butler Lumber Company - Case Study Example

EXECUTIVE SUMMARY This case analysis of Butler Lumber Company sought to study the situation and prospects of a company seeking to expand its sales volume but is hampered by lack of working capital with which to pursue its objectives. The company had registered good records in terms of sales growth over the past four years but had encountered financing problems when one of the partners left and had to have his stake in the business bought out of the assets of the business now registered as a corporation. Despite a loan with Suburban Bank, Mr. Butler, the company head, sought to apply for a bigger amount of loan which his present bank could not give and decided to negotiate for that amount with Northrop National Bank for the amount of $465,000. The problem was that the company lacked enough liquidity and solvency despite stable and rising sales. The writer attempted to derive the appropriate amount of loan at the projected sales level of $3,600.00, using two approaches based on the asset levels underpinning sales. An attempt was made also to determine the impact of reducing operating expenses, mainly by decreasing the salaries and perks of the company head, on profitability, and therefore on the ability of the company to pay for its current obligations. The study also explored the financing alternatives that Mr. Butler could explore in case he failed to qualify for the loan or in case he was not amenable to the restrictive terms and conditions that Northrop National Bank would impose for its own protection. This included finding an appropriate capital structure consisting of new quity infusion from venture financiers or a combination of long-term debt and equity so that there would not be so much pressure on the company to pay short-term debts that it would otherwise need to support continuing operations for long run profitability. A Case Analysis in Finance BUTLER LUMBER COMPANY The Situation Butler Lumber Company engages in the retail distribution of lumber products in a large city in the Pacific Northwest. Owned and managed by Mark Butler, the company was incorporated in 1988 after Mr. Butler acquired the interests of his son-in-law for $105,000 which he financed with a long-term loan in the sum of $70,000. The company achieved rapid sales growth since 1986, chalking up more than 50 per cent growth per year in the first two years but falling to 18 per cent and 34 per cent in 1989 and 1990. To finance the growth in his business, Mr. Butler borrowed $247,000 from Suburban National Bank beginning in 1989. Aside from the fact that the bank asked Mr. Butler to provide collateral from the loan, he also thought that the loan was insufficient for his working capital needs and decided that he would need a maximum loan of $465,000 or $218,000 more than his present limit, together with some flexibility with regard to the terms. While the case says that the company did well by controlling operating expenses and obtaining discounts on purchases, the net incomes and the profit margins belied this claim. Return on sales were 1.8 per cent in 1988, 1.7 per cent in 1989, and 1.6 per cent in 1990 although showing slight increases in absolute terms. The case also states that Mr Butler drew rising amounts from the company for his salaries and undisclosed amounts as perks. He obtained $95,000 as salary in 1990 when net profit was only $44,000. Because a short-term bank loan charges more than 10 per cent annually and requires some terms and conditions that Mr. Butler found unfavorable, he might have done better to look at retained earnings as a source of funds for the expansion of his business volume. Analysis of the Situation Northrop National Bank is investigating the creditworthiness of Butler Lumber Company and has come up with some initial findings. Mr. Butler is an energetic worker supported by a capable assistant and and workforce of 10. He exercises good solid control over operations. His business is said to be shielded from economic downturns because of its focus on repairs. The banks credit investigator projected a sales growth of 33.8 per cent – roughly the same as the previous years – for 1991, and he thought that this may be exceeded if prices improved. Since 1991, due to cash tightness, the company had to forgo some price discounts from its suppliers as it had used its funds to pay its financial commitment to Mr. Starks on top of working capital to finance inventories and receivables owing to the expanding sales. Although it did not overdraw its loan limit with Suburban Bank, the tight situation was enough to prompt Mr. Butler for an alternative source of funds. Northrop National Bank and Mr. Butler held preliminary discussions on the loan. It will be a revolving secured 90-day credit, with restrictions on additioanl borrowing, minimum working capital level, prior approval on fixed assets acquisiton, and limits on personal withdrawals by Mr. Butler. The loan with Suburban will have to be settled and no further banking srelationship with that bank would be allowed for the duration of the loan. a. Management style. From the case facts, it might be inferred that Mr. Butler is somewhat of a hard-working control freak who wants advantages without the costs. That he was not able to negotiate a more friendly settlement with his son-in-law with regard the purchase of the latters minority interest, bespeaks of a personality that cannot get along and is unwilling to negotiate, to go halfway. He is operating his corporation as if it were his personal domain, as if it were a single proprietorship. It would be difficult for him to allow others to take part the management and control of the business. It might be difficult for him to allow his company to go public. b. Personal assets Mr. Butler does not have enough personal asssets to enable him to comply with the terms of Suburban Bank and now with Northrop Bank. Banks have to protect themselves from financial adversities caused not only by managerial incomnpetence (which does not apply to Mr. Butler) but also by systemic or exogenous factors such as a recession or unfavorable trends in the industry. He will need to negotiate the terms so that this weakness can be remedied or de-emphasized. Financial Analysis a. Sales. The sales performance of Butler Lumber Company (Table 1) had been outstanding during the first two years starting 1986 but had fallen slightly after the departure of Mr. Starks. Sales grew only by 19 percent in 1989 but recovered with a 33.8 per cent growth in 1990. Gross profit margins held steady at 28 percent in 1988 and 1989 but fell slightly to 276 percent in 1990. Net profit margins steadily dropped, albeit slightly, from 1.8 of sales in 1988, to 1.7 percent in 1989 and 1.6 per cent in 1990. Operating expenses, which bore the brunt of Mr. Butlers salaries and personal withdrawals, continued to rise in line with the sales increase. Operating expenses rose 28 percent in 1990 compared to a rise of only 21 per cent the previous year. The net profit increase of 29 percent in 1990, compared to 10 per cent in 1989, is deceptive owing to the small base in the net income to start with. b. Assets and Liabilities 1. Working capital Total assets rose 23.9 percent in 1989 and 26.8 percent in 1990. Current assets rose by larger percentages with corresponding growth rates of 27.4 per cent and 30.2 per cent . Receivables rose 42.8 per cent and inventories by 28 per cent. The common size statements show that receivables comprised 34 per cent of assets in 1990, compared to only 30.2 per cent the previous year, and inventories was 44.8 percent of assets compared to 40.2 the previous year. Sales growth was achieved at the expense of rising levels of both receivables and inventories. 2. Debt. Total liabilities increased 42.7 per cent in 1990, compared to 44.2 per cent the year before. This was accounted for by the increased notes payable to bank (an increase of 59.6 per cent) and accounts payable by 33.3 per cent as the company allowed trade credits to pile up due to cash constaints. There is very little long-term debt, declining by the same amount of $7,000 annually as it represented a 10-year debt to finance the acquisition of Mr. Starks interest in the business. There is no long-term debt that can be considered as helping to build corporate assets. 3. Net worth. Stockholders equity was $270,000 in 1988, and this has grown to $348,000 in 1990, thanks to the 100 per cent retention of earnings. However, the increase in retained earnings is too small to be able to significantly affect the net working capital favorably. 4. Sources and Uses of Cash The cash flow statements (Table 5) show that substantial amounts of cash were used to buttress the need for funding in receivables and inventories in both 1989 and 1990, so that cash from operations were insufficient, displaying shortfalls of $36,000 and $70,000 respectively. These were funded from the increase in accounts payable and bank loans. The cash levels in the balance sheets fell in both years. Ratio Analysis Profitability. A very important area of consideration when banks examine the creditworthiness of a potential borrower is the record of the companys profitability (See Table 6). As stated above, the net profit margins of the company were always below 2.0 and progresively declining each year. The return on assets, however, showed stability at 4.7 percent, while the return on stockholders equity was steadily rising, almost imperceptibly, from 11.1 per cent in 1988 and 1989, but rose to 12.6 per cent in 1990. The same stability is demonstrated by the operating profit margins. Liquidity Liquidity would show whether the company can pay its short-term obligations. The current ratio has been falling significantly from 1.8:1 in 1988, to 1.35:1 in 1990. The more stringent test, the acid-test ratio, shows an even more alarming trend. Clearly, the company does not look like a good applicant for a loan that would mature within one year, as it does not have sufficient equity to back up its current assets. Leverage The leverage ratios measure a companys long-term solvency. Butler Lumber Company is relatively highly leveraged mainly because of its high level of current debt from Suburban bank and from the rising level of trade payables. The ability to service debt is also declining. On the basis of these criteria, the company does not appear to be a very attractive candidate for a loan. It would require some rather stringent conditionalities to be applied and accepted before the company can qualify. Activity ratios Activity ratios measure a companys ability to utilize its assets efficiently to achieve revenue and income targets. The inventory turnover shows an increasing level of inventory relative to sales from 1988 to 1989, but holding steady in 1990. Accounts receivabcle turnover is however worsening, indicating that receivables have been allowed to grow without an effective means of improving collection of overdue accounts. Some kind of drastic changes and management controls need to be effected in this area of operations. Synopsis of Financial Analysis On the positive side, Butler Lumber Company is showing generally good sales growth. Its problems are not in the marketing side of operations but in financial management. The decision of management to buy out Mr. Starks equity hurt the company at a time when it required more funds to support sales expansion. The loan that the company was able to obtain from Suburban Bank was found to be insufficient for its needs. The lack of funds caused the company to forgo discounts form suppliers. The extension of credit purchases coupled with inadequate collection efforts caused receivables to rise and working capital needs to grow bigger. The profit picture needs improvement so that it can generate more cash from operations. The company does not have enough liquidity and solvency chadracteristics to incline lenders to lend money to it unconditionally or without security. Analysis of funding requirements. Butler Lumber is requiring an additional $218,000 in loans on top of an existing credit with Suburban in the ;amount of $247,000. Concern over the liquidity and solvency issues regarding the business performance of the company prompted Suburban to ask for security of the loan. Mr. Butler does not like this requirement, but the other bank, Northrop, is similarly inclined as the first bank, and would also impose additional conditions for the higher level of loans. It is not unusual for banks to adopt this stance, considering that its own assets would be put at risk when the fiunancial profile and prospects do not look good. In the absence of any calculation method used by Butler, this writer will attempt to use some steps to determine the funding requirements of Butler Lumber Company. a. The relationship of sales to assets. It is a fact that an expansion in sales cannot occur unless it is backed up by an increase in the level of supportive assets -- mainly in the shape of working capital -- but also fixed assets. Investment in plant and equipment would enable production targets to be met in line with market demand. Theoretically, a certain percentage increase in sales would imply a certain percentage increase in assets, which increase may be less than that of sales because of economies of scale as well as the utilization of any idle productive capacity existing at the time. The case states that the first-quarter sales of the company was $718,000, and that 55 percent of the annual sales are realized during the second and third quarters. By deduction, this amount can represent half of the balance of 45 percent - equal to 22.5 per cent --and that the other portion of the same amount will be realized in the fourth and last quarter. On this basis, the total projected sales for 1991 should be $3,161,000. However, the banks investigator forecasted an optimistic sales forecast of $3,600,000. This study will therefore consider both assumptions of sales level for analytical purposes. For lack of standard common-size ratios, this study will apply the ratios of 1990 to 1991, which should look reasonable in view of the slight variability observed during the 3 year of financial data we have studied. We apply the percentages on each income statement item, with the slight modification in the operating expenses item. We would like operating expenses, which contains the salaries and perquisites of Mr. Butler to be reduced from 24 per cent to 20 per cent. With this the major computational modification that the bank would likely require, we can proceed to the projection of the sales and net income of the company for the year 1991. Table 7 contains the data laid out on the basis of these assumptions. If the cost cutting is followed, the loan has an improved chance of being approved, and the company will have anough cash generated from operations to enable it to pay off its short-term loan. Note that sales rose 18.6 per cent in 1989 and 33.8 per cent in 1990. Correspondingly total assets rose 23.9 per cent and 26.8 percent respectively. The ratio of sales growth of 1990 to asset growth for the same period was 33.8/26.9 or 1.256:1. Let is assume that sales are projected to rise 33.6 per cent to $3,600,000 as stated by the bank investigator from the 1990 level of $2,694,000 -- an increase of $906,000. Dividing the ratio into the projected sales growth (33.6/1.256), we obtain 26.75 per cent as the projected growth in supporting assets. By multiplying .2675 by $906,000, we obtain $242,355 as the additional asset requirement, to be obtained through a loan, to achieve the sales target. This exceeds the amount of $218,000 being applied for. Clearly, the loan amount either has to be increased, or else management will have to look for supplementary financing. It is otherwise if the sales target were a more realistic $3,161,000 based on the case data. An increase to this level is only $467 above the 1990 level - or 17.3 per cent. Dividing 1.256 into this growth rate will produce $137,714 in additional loan requirement. Mr. Butler will just have to add this to $247,000 loan which it has with Suburban, and he only needs to apply for a loan of $384,714, which is significantly less than the original loan intended to be applied for ($465,000). b. An alternative method: Estimation of external funding need (EFN) Using the formula for an external funding need: EFN = (A*sg) - (p*S*R*1.sg) where A is total assets, sg sales growth target, p net profit margin, S sales, R the earnings retention rate. EFN =( 933*.336) - (.016*3,600,000*100%*1.336) = 313,488 - 76,953 = $236, 534 This result is close to the amount of $242,355 we obtained earlier using the same assumptions. Analysis of projections of sales and net income for 1991 Using the common size statements, the writer has applied the built-in ratios of the income statements of 1990 to apply to the two assumed level of sales for 1991 (See table 7) in order to make projections of future net earnings. While most of the ratios have been preserved, the operating expenses, where Mr. Butler drew his big salary and withdraw funds representing the perks of his position, have beens reduced from 24 per cent to 20 per cent. This is believed to be a reasonable move, and Northrop National Bank is expected to discuss this matter with Mr. Butler. With the belt-tightening measure, the net income of the company would improve considerably as economies are instituted, so that the company would show net earnings of $180,00 under assumption A and $199,000 under Assumption B. Answers to questions. 1. Why does Mr. Butler have to borrow so much money to support this profitable business? Mr. Butler has to borrow $465,000 because he projects that because of the significant increase in sales forecast for the year 1991, such an additional amount would be required. He did not, however, show how he derived such figure as his funding requirement. 2. Do you agree with his estimate of the company’s loan requirements? It hard to agree with a loan requirement when no computational procedure is shown. The analyst will have to find out, using any method he thinks is applicable, to determine whether the loan requirement is reasonable. In my report, the loan requirement is short of requirement if the target sales is $3,600,000, but is slightly more than required if the target sales is the more realistic one of $3,161,000. 3. How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)? Based on two methodologies I have used, the loan requirement will be between $236, 534 and $242,355 . This will be on top of the present loan Mr Butler has with Suburban Bank. In other words, he will need at least $483,534 in loans from Northrop bank. 4. 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? I would ask Mr. Butler to obtain the loan offered by Mr. Dodge but to negotiate some of the terms and conditions, in the short run. He may have to accede to a reduction in salary and restraint with regard to personal withdrawals. He should ask for leniency with regard to maturities, with possible extensions of the loan into the future, beyond one year, for as long as the business needs the banks assistance. In the long run, I would advise him to analyze and take a hard look at the capital structure of the company. He can look for venture capitalists to take part in the business through the equity channel or through the alternatives of preferred stock and/or convertible bonds, or a good combination of both. The risk of an equity participation by outsiders is that he will have to share control, for which he has little inclination as of the present, and he will probably have to suffer a dilution in his (and other existing stockholders) equity. But he will have to decide after weighing the pros and cons of these alternatives. Otherwise, he will have to sell his business to others who can navigate the business environment better. 5. As Mr. Dodge, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan? I will have to require Mr. Butler to reduce the operating costs, starting with himself, by reducing his salary for the duration of the present difficulties. I would have to protect the banks interest first. Because the business is profitable, I would be willing to extend qualified help, and hope that Mr. Butler would cooperate. It would be in our mutual best interests if we understand each others viewpoints and cooperate. I would also look at the business from a long-term perspective, so that as the business prospers, the bank would also prosper in its lending activities to the company. If the economies are instituted as shown on Table 7 of this paper, then the company can show enough profits to enable it to pay its debt on time. 6. What are the alternatives open to Mr. Butler if Mr. Dodge refuses his request for an increased credit line? Mr Butler has many alternatives. He can ask for leniency from his son-in-law, and request that the obligation be converted back into equity. I can look for venture capitalists who can offer equity or long-term debt. I can improve my collection by using the method of aging receivables and sending some problematic cases to a collection agency. I can change my inventory management strategy by using the Just-in-time now being used by many companies. Good inventory planning will ensure this. I can resort to belt tightening, reducing my pay and my perks until the financial situation of the business improves. BIBLIOGRAPHY Brealey, RA, Myers, SC, Marcus, AJ. 1999 Fundamentals of Corporate Finance (2nd ed.). Brigham EF & Gapenski, LC 1996, Intermediate financial management, 5th edn., The Dryden Press, Orlando, FL Cornell, C & Shapiro, AC 1993, Financing corporate growth," in Donald H. Chew, Jr. ed., McGraw-Hill: New York Downes, John & Goodman J.E. 1987 Dictionary of Finance and Investment Terms (2nd ed), Van Horne, JC 1983. Financial management and policy, 2nd edn, Englewood Cliffs, NJ.: Prentice-Hall, T A B L E S Table 1 COMMON SIZE INCOME STATEMENTS Butler Lumber Company 1988 percent of sales 1989 percent of sales 1990 percent of sales First Quarter 1991 Net sales $1,697 100.0 $2,013 100.0 $2,694 100.0 $718a Cost of goods sold Beginning inventory 183 10.8 239 11.9 326 12.1 418 Purchases 1,278 75.3 1,524 75.7 2,042 75.8 660 $1,461 86.1 $1,763 87.6 $2,368 87.9 $1,078 Ending inventory 239 14.1 326 16.2 418 15.5 556 Total cost of goods sold $1,222 72.0 $1,437 71.4 $1,950 72.4 $ 522 Gross profit 475 28.0 576 28.6 744 27.6 196 Operating expense b 425 25.0 515 25.6 658 24.4 175 Interest expense 13 0.8 20 1.0 33 1.2 10 Net income before taxes $ 37 2.2 $ 41 2.0 $ 53 2.0 $ 11 Provision for income taxes 6 0.4 7 0.3 9 0.3 2 Net income $ 31 1.8 $ 34 1.7 $ 44 1.6 $ 9 Table 2 ANNUAL PERCENTAGE CHANGES BALANCE SHEETS Butler Lumber Company 1988 percent increase (decrease) 1989 percent increase (decrease) 1990 First Quarter 1991 Net sales $1,697 18.6 $2,013 33.8 $2,694 $718a Cost of goods sold Beginning inventory 183 30.6 239 36.4 326 418 Purchases 1,278 19.2 1,524 34.0 2,042 660 $1,461 20.7 $1,763 34.3 $2,368 $1,078 Ending inventory 239 36.4 326 28.2 418 556 Total cost of goods sold $1,222 17.6 $1,437 35.7 $1,950 $ 522 Gross profit 475 21.3 576 29.2 744 196 Operating expense b 425 21.1 515 27.8 658 175 Interest expense 13 53.8 20 65.0 33 10 Net income before taxes $ 37 10.8 $ 41 29.3 $ 53 $ 11 Provision for income taxes 6 16.7 7 28.6 9 2 Net income $ 31 9.7 $ 34 29.4 $ 44 $ 9 Table 3 COMMON SIZE BALANCE SHEET Butler Lumber Company 1988 PERCENT OF TOTAL ASSETS 1989 PERCENT OF TOTAL ASSETS 1990 PERCENT OF TOTAL ASSETS 1991 PERCENT OF TOTAL ASSETS Cash $ 58 9.8 $ 48 6.5 $ 41 4.4 $ 31 2.8 Accounts receivable, net 171 28.9 222 30.2 317 34.0 345 31.5 Inventory 239 40.2 326 44.3 418 44.8 556 50.8 Current assets $468 78.9 $596 81.0 $776 83.2 $ 932 85.2 Property, net 126 21.2 140 19.0 157 16.8 162 14.8 Total assets $594 100.0 $736 100.0 $933 100.0 $1,094 100.0 Notes payable, bank $ - - $146 19.8 $233 25.0 $ 247 22.6 Notes payable, Mr. Stark 105 17.7 Notes payable, trade -- - - - 157 14.4 Accounts payable 124 20.9 192 26.1 256 27.4 243 22.2 Accrued expenses 24 4.0 30 4.1 39 4.2 36 3.3 Long-term debt, current portion 7 1.2 7 1.0 7 0.8 7 0.6 Current liabilities $260 43.8 $375 51.0 $535 57.3 $ 690 63.1 Long-term debt 64 10.8 57 7.7 50 5.4 47 4.3 Total liabilities $324 54.5 $432 58.7 $585 62.7 $ 737 67.4 Net worth 270 45.5 304 41.3 348 37.3 357 32.6 Total liabilities and net worth $594 100.0 $736 100.0 $933 100.0 $1,094 100.0 Table 4 ANNUAL GROWTH RATES BALANCE SHEETS Butler Lumber Company 1988 PERCENT INCREASE (DECREASE) 1989 PERCENT INCREASE (DECREASE) 1990 PERCENT INCREASE (DECREASE) 1991 Cash $ 58 (17.2) $ 48 (14.6) $ 41 (24.4) $ 31 Accounts receivable, net 171 29.8 222 42.8 317 8.8 345 Inventory 239 36.4 326 28.2 418 33.0 556 Current assets $468 27.4 $596 30.2 $776 20.1 $ 932 Property, net 126 11.1 140 12.1 157 3.2 162 Total assets $594 23.9 $736 26.8 $933 17.3 $1,094 Notes payable, bank $ - Inf. $146 59.6 $233 6.0 $ 247 Notes payable, Mr. Stark 105 0 - - Notes payable, trade -- - - - Inf 157 Accounts payable 124 54.8 192 33.3 256 (5.1) 243 Accrued expenses 24 25.0 30 30.0 39 (7.7) 36 Long-term debt, current portion 7 0 7 0 7 0 7 Current liabilities $260 44.2 $375 42.7 $535 29.0 $ 690 Long-term debt 64 (11.0) 57 (12.3) 50 (6.0) 47 Total liabilities $324 33.3 $432 35.4 $585 26.0 $ 737 Net worth 270 12.6 304 14.5 348 2.6 357 Total liabilities and net worth $594 23.9 $736 26.8 $933 17.3 $1,094 Table 5 CASH FLOW STATEMENTS Butler Lumber Company 1989 1990 I. OPERATING Net income 34 44 Depreciation expense - - (Increase) Decrease in Accounts Receivable (51) (95) (Increase) Decrease in Inventories (87) (92) Increase (Decrease) in Accounts Payable 68 64 Increase (Decrease) in Accrued expenses 6 9 Cash flow from Operations (36) (70) II. INVESTING (Acquisition) of property, plant and equipment (14) (17) III. FINANCING Increase in notes payable -Bank 146 87 Increase (decrease) in notes payable- Mr. Stark (105) - Increase (decrease) in long term debt ( 7) ( 7) Cash flow - Financing 34 80 Change in cash ( 10) ( 07) Table 6 FINANCIAL ANALYSIS Butler Lumber Company Ratio Formula 1988 1989 1990 I. PROFITABILITY RATIOS Return on total assets Profits after taxes/Total assets 5.2 4.6 4.7 Return on net worth Profits after taxes/Net worth 11.1 11.3 12.6 Operating profit margin Net profit before interest and taxes/ Sales 2.9 3.0 3.2 Net profit margin Profits after taxes/ Sales 1.8 1.7 1.6 II. LIQUIDITY RATIOS Current ratio Current assets/ Current liabilities 1.8:1 1.59:1 1.35:1 Quick (acid-test) ratio Current assets net of inventory/ Current liabilities 0.88:1 0.72:1 0.54:1 Inventory to net working capital Inventory/ Net working capital 1.01:1 1.28:1 1.54:1 III. LEVERAGE RATIOS Debt to assets Total debt/ Total assets 54.5% 58.7% 62.7% Debt to equity Total debt/ Total net worth 1.2:1 1.4:1 1.68:1 Long-term debt to equity Long-term debt/Total net worth Times interest earned Profit before interest & taxes/ Total interest charges 3.85x 3.05x 2.61:1 IV. ACTIVITY RATIOS Inventory turnover Sales/ Inventory of finished goods 8.04x 7.11x 7.24x Fixed asset turnover Sales/ Fixed assets 13.5x 15.1x 18.1x Total assets turnover Sales/ Total assets 2.86x 2.73x 2.56x Accounts receivable turnover Sales/ Accounts receivable 9.9x 9.1x 8.5x Average collection period Accounts receivable/Ave daily sales 36.7 days 35.8 days 36.6 days V. SHAREHOLDERS RETURNS RATIOS Not applicable; firm not listed. Table 7 HISTORICAL BALANCE SHEETS AND 1991 PROJECTIONS Butler Lumber Company 1988 1989 1990 First Quarter 1991 Assumption A 1991(Pro forma) Assumption B 1991(Pro forma) Net sales $1,697 $2,013 $2,694 $718a 3.161 3,600 Cost of goods sold Beginning inventory 183 239 326 418 382 435.6 Purchases 1,278 1,524 2,042 660 2396 2728.8 $1,461 $1,763 $2,368 $1,078 2778 3164.4 Ending inventory 239 326 418 556 485 558 Total cost of goods sold $1,222 $1,437 $1,950 $ 522 2288 2606.4 Gross profit 475 576 744 196 893 993.6 Operating expense b 425 515 658 175 638 (20%) 720 (20%) 255 274 Interest expense 13 20 33 10 45 45 Net income before taxes $ 37 $ 41 $ 53 $ 11 210 229 Provision for income taxes 6 7 9 2 30 30 Net income $ 31 $ 34 $ 44 $ 9 180 199 Read More