Wilson Lumber Co Loan Application Memorandum
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Wilson Lumber Co Loan Application MemorandumThe lumber business produces the following types of products: plywood, moldings, and sash and door products. Companies in the lumber industry generate sales through new home construction and home repair. The overall industry outlook is favorable according to the bank’s investigator who mentions that sales may reach $2.5 million in 1985 and perform even better if the price of lumber increases. There is however a risk that a slowdown in economy may affect the rate of new home construction. This helps to highlight the importance of getting the right balance of jobs between new home constructions and repair jobs for your business to be successful. Other factor include careful management of operating expenses, timely loan/credit payments, timely payment collection, and good inventory management. Wilson Lumbers’ business model focuses a higher proportion on repair work. He employs 11 staff members, his property provides him direct access to a railroad siding, and he owns 2 large storage buildings. Based on his profitability ratios Wilson’s business is profitable with a high return on asset of 5% in 1982 and  4.7% in 1983-4, gross margin of 28%, 27.6%, and 28.6% from 1982 to 1984 respectively, and his net income has continued to grow from $21K, $24K, to $31K every year since 1982. Nonetheless, there are several areas of concern such as the increasing trend in the collection period (36 to 43 days), payment period (26 to 34 days) and inventory level (167 to 292) from 1982 to 1084. The increased collection period could be attributed to Mr. Wilson not paying attention when customers accounts are due and given the limited number of employees he doesn’t have the resources/bandwidth to chase down customers for payments. He is also not taking advantage of the 2% discount for early payments and has been falling behind in his own payments to creditors. Last but not least, he has been holding on to more and more inventory putting into question his ability to accurately forecast demand.
Mr. Wilson’s limited amount of cash is largely tied in inventory and loan payments. The low line of credit taken from Suburban National Bank has meant that he has had to use cash to fund the business instead of debt. As the collection period and inventory are increasing his cash is decreasing and so he has to borrow as reflected by the increasing debt to asset ratio of 0.55 in 1982 to 0.63 in 1984. In addition, Mr. Wilson took out an expensive short term debt when he mortgaged his house to buy out Mr. Stark’s interest in the company. Line of credit of $325K will not be sufficient to meet Mr. Wilson’s funding needs for 1985-1988. For the first scenario where growth is 25% per year and payment period of accounts payable is 55 days we estimate that he will need loans in the amounts of $316K, $380K, $459K, and $557K  respectively from 1985 to 1988. For the second scenario where growth is 25% per year and the payment period of accounts payable is reduced to 10 days we estimate that he will need loans in the amount of $626K, $768K, $944K, and $1,163K respectively from 1985 to 1988. For the last scenario where growth is 14% per year and payment period of accounts payable remains at 10 days we estimate that he will need loans in the amount of $626K, $708K, $800K, and $905K respectively from 1985-1988. The first scenario being the one requiring the least amount of total funding and hence optimal option for Mr Wilson.