Essay About Net Income And Shortage Of Cash

Clarkson Lumber Company
MSFI 421 Corporate Finance Analysis Assignment 1Ӏ. BackgroundClarkson Lumber Company has been in growth during recent years and anticipated a further increase in sales. This firm has the seasonally sales which concentrates on 6 months from April through September. The firm found it necessary to increase its borrowing from the bank. But the Suburban National Bank had a maximum loan $400,000 for Clarkson to borrow. In 1994, Clarkson repaid his brother-in-law $200,000 and his brother-in-law gave him a note for $200,000 as well.The Northrup National Bank sent inquiries concerning Mr. Clarkson to a number of firms that had business dealing with him. One of his large suppliers have great comments on him.This firm has suffered shortage of cash and need to arise cash for investment.Π. AnalysisPart 1. The distinction between profits and cash requirements for Clarkson Lumber[pic 1]Net income and cashWe can find that the net income and net cash inflow here. The net income in 1994 is $68,000, the net cash increase we calculate is $9,000; The net income in 1995 is $77,000, the net cash increase we calculate is $4,000. So we can find that although the net income is high (the profit in balance sheet is high), the real cash this firm hold is very low.

Sales—price competitionAs we can learn from this case, this firm has a relative high sales based on the successful price competition. However, the revenue does not go up as much as the sales raise. In the meanwhile, Clarkson took the control of operating expenses and the quantity of purchased materials. But this firm did not have enough money to make the payment before 10 days to have those discounts. Although after borrowing money, the increase of accounts payable decreases, but the increase of expense raises. So we can see that the net cash inflow is not as much as the net income shows.InventoryThe statement of cash flows shows that the inventory increase in both year. The increase amount in year 1994 is $95,000, while in year 1995 is $155,000. Thus there is a significant increase in the growth of inventory. According to the true situation, this firm has a rapid growth in sales in these two years. The company’s change in inventory purchase amount increase from $520,000 in 1994 to $850,000 in 1995. And the change in cost of goods sold amount increase from $432,000 in 1994 to $790,000 in 1995. Because of the good performance in sales, the Clarkson Lumber Company prefers to increase inventory. Even though the profit indicates this company has enough money to increase more inventory, the cash balance shows that the company’s net cash inflow is not too much. It’s just $9,000 in 1994 and $4,000 in 1995. The situation of lack in cash makes the company have to raise money from the bank to support its rapid growth in sales.