The Dawson Lumber Company was founded in the 1870s by the Dawson family to market the lumber on their land. In 1950, Dawson Lumber owned four small lumber yards in the Cornwall area, each operating as a separate company. However, in 1965, J.H. Dawson became president and amalgamated the four companies into the Dawson Lumber Company. The company had acquired seven more lumber yards north and west of Cornwall, Ontario but further growth was limited by J.H. Dawson’s belief that growth should only be financed by internally generated funds.
For over one hundred years, Dawson Lumber had been dealing with the Cornwall branch of the Eastern Bank and, in 1993, borrowed approximately $1.5 million to finance inventory build-up needed to meet seasonal sales. From April to November, 77 percent of the sales occurred evenly, while 23 percent were evenly distributed from December to March. The demand is seasonal which comprises of 8 months peak season and 4 months off season for which the sales remain low. The company’s sales were between $10 and $15 million in the late 1980s, with 90 percent being wholesale sales to local residential contractors.
After the retirement of J.H. Dawson, his son Doug Dawson took over the business and reorganized the company’s 11 branches into three regions. The Northern Region served an urban market and consisted of three yards just outside the city of Ottawa. Four lumber yards in the Cornwall area made up the Eastern Region and five lumber yards near Kingston formed the Western Region. The Eastern Region was a rural market while the Western region was partially a resort and partially an urban area.
Each region was made the responsibility of an area supervisor who had worked for many years in the company’s lumber yards. A management committee consisting of the president, controller, and area supervisors met monthly to discuss operational strategy. In an attempt to minimize inventory levels, one branch in each region operated as a depot. A fleet of trucks kept frequent and regular schedules between the lumber yards and the depot provide rapid delivery to the customer. From the year 1996-1998 the gross margin ranges from 26% to 31% on average of lumber sales.
The regular price was the price at which the item could be charged and delivered. The discount price applied if the customer wished to pay the cash and take the goods away. A third price was also charged if the customer wished to pay cash and have the purchase delivered. The new store’s sales in its first two months of operations were $2.28 million. To sum up the company has remarkable marketing activities.
On the basis of comparing the financial information for the past three years 1996, 1997 & 1998, we can clearly see that due to consistent increase in revenue because of rapid market growth and reorganization of the company’s branch structure has greatly helped in achieving the sales growth from 21.1% in the year 1996-97 to 38.6% in the year 1997-98. This sale growth is indicative of the fact that there had also corresponding increase in the net profit leading to more equity and total assets base.
However, despite such development and growth, the company is suffering from operational inefficiency due to crisis in its poor management of the working capital and particularly the timing in replenishment of inventories and other liquid assets majorly accounts receivables. It was evident from the financials that working capital seems to be stuck because it has been increased from $ 4.3 million to $ 6.8 million.
The collection period for accounts receivable turned out to be 72 days on average which is substantially high. In addition, the days in inventory sale were increasing over the period from a minimum of 112 to 153 days. Moreover, due to delay in collection of accounts receivable, the accounts payable days are also increasing over the subsequent years. Although the fixed asset turnover ratio was good in 1996 but it is deteriorating in subsequent years however the total asset turnover ratio is also very low.
Strictly speaking, at present the Dawson Lumber Company is being financed by a bank loan. The company’s equity structure constitutes common stock capital amounting to $4.3 million and the accumulated earnings. Presently, the company’s financing needs are met through two types of bank loans which include a working capital loan obtained specifically to meet the working capital requirements and the present long term loan amounting to 4.2 million.
Both the loans are obtained from National bank of Canada (NBC). The NBC took accounts receivable and inventory as collateral and as a condition of the loan against the charge on the borrowed amount for which Dawson undertook to provide quarterly financial statements and monthly reports of inventory, sales and receivables.
Now as far as the company’s cash flow is concerned, the company has been suffered with very weak cash flows because inventory and receivables have increased which result in negative cash flows and due to increased in accounts payable resulting in positive cash flow thus overall cash generated from operations remain intact. However as mentioned above it is operational inefficiency due to delay in collection from customers resulting in delay in payments to creditor. The current ratio is at satisfactory level.
If we talk about the company’s leverage, we can see that initially the interest coverage ratio in the year 1996 was low however it is considered to be satisfactory in subsequent years. But here is an alarming situation that has gone much intense over the period and proves to be the key business concern for the company and its sustainability in the long run over a foreseeable future, that is, the highest debt to equity ratio.
We can see that debt to equity ratio was 55% in the year 1996 which decreased to 28% due to mortgage repayments. However, during the year 1997-98, the company gone to high leverage due to 99% debt to equity ratio. This was indicative of the fact that the company has obtained a long term bank loan and an increase in the operating line of credit to $ 5 million.
Summary & Conclusion:
Under the present circumstances and the present growing needs of the company of financing, it is not advisable for the company to go for additional financing since it’s already 99% geared and leveraged. Although the company’s additional financing can be backed up by the amount of receivable and inventories. But the inventory and receivables needs to be insured so that in case of loss due to fire or flooding the bank can realize the amount from the insurance company.
Apart from cost cutting strategies, there is a major need to improve the fund flow mechanism by following up the customers to tender payments immediately and impose commissions on late payments so that the company would be able to disburse payments to creditors. Moreover, the marketing activities should be improved further so that it must take less days to sale inventory. In this way the company will be able to generate more funds frequently and thus the need for additional financing will be minimized. (taimoor880 at gmail)
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