This article will examine the case study written by Roberts and Hendry (1991) about one of the prominent lumber wholesalers, Atlantic Lumber Trader (ALT). The case study revolves around Lynne Thomas’ perspective as a credit assistant at the Maritime Bank who was ordered to review the loan profile of the company. In 1989, the company recorded a terrible loss of about 174 thousand dollars at the end of the previous year due to mismanagement by the former leader, David Lawson.

The owners of the company were brother and sister of the Hall family, Edward and Gail. Both took over the company from David Lawson to recover the company’s performance. After several corrective measures, the siblings tried to negotiate an increase in the line of credit with the bank. Lynne tried to consider every internal and external aspect of the company to decide whether to call or provide the loan.

The root problem and fundamental causes of the Atlantic Lumber Trader case study

The root problem of this case study is the speculative management from David Lawson and the lack of control from Edward and Gail. The issue became very significant due to the traditionally low margin of ALT. Due to this problem, the company recorded a significant loss at the end of 1988 (Roberts & Hendry, 1991). If the company operates at a loss for an extended time, it will soon be at high default risk.

The fundamental causes can be separated into two categories: management and financial issues. The management allowed inefficient policies, such as the rental division that operated at a loss, speculative purchasing, and sales using irregular lots. These management policies ultimately result in a large amount of inventory containing lumber with unpopular lengths that have to be written down. These policies are left uncontrolled by the major shareholders, Edward and Gail, to the point that ALT recorded a substantial loss.

The industry has been known for its inflexibility in operation since it must operate at a low margin. The company naturally has low profitability ratios. Even in the previous three years when the company recorded profit, the net profit margin was only 0.66% to 1.01%. The company had no allowance for poor management that can easily sweep off the margin as the case study has shown.

The company’s liquidity ratio was poor. Liquidity ratios measure a company’s capability to pay back short-term debt obligations. This ratio can also be used to assess a company’s ability to issue more debt to explore new means for growth through various means (Rist & Pizzica, 2015). The most common liquidity ratio is the current ratio, which is calculated by dividing current assets by current liabilities (Brigham & Houston, 2017). The current ratio of ALT was 0.83, which was lower than the industry benchmark of 1.50. The current ratio showed that the company’s current liabilities were higher than the company’s current assets. This was a concerning issue that can easily put the company on the brink of bankruptcy.

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Possible alternatives

Several corrective measures done by Gail Hall have been spot on. She took over the day-to-day operation to fix the management issues and improved efficiency as well as injected cash to fix the financial issues. The rental property was sold, the number of staff was reduced, and the inefficient policies were abolished. These were the right measures to recover the company’s profitability. There are several other possible alternatives that I can recommend for Atlantic Lumber Trader, as follow.

  1. Improve profitability ratios by creating a vertical integration or opening a new line of business that has better profitability. Working with only a 0.6% net margin ratio must be very difficult. The company would not allow any mistakes or inefficiencies that can decrease the margin. Vertical integration may improve the company’s net profit margin. However, it should be done carefully and supported by strong analyses.
  2. Offering a proportion of the current owner’s shares to a new investor to improve the company’s debt-to-equity ratio. As the debt-to-equity ratio increases, the company’s financial leverage is also increasing, which means that the company relies more on debt rather than equity to fund its assets (Heisinger & Hoyle, 2012). Even after Edward and Gail Hall reduced the debt-to-equity to 4:1, it was still concerning since the industry benchmark was at 2:1. Adding more loans would mean that the ratio will be higher and put the company at risk.
  3. Create a high-return capital budgeting project. The new investor will bring more cash that can be used to execute high-return capital budgeting projects. The company can improve efficiency by purchasing a sawmill business or a more efficient lumber transportation system.
  4. Implementing a better inventory management system to improve inventory turnover and overall asset turnover.

Recommendation of the plan of action

The most urgent issue was to recover the company’s profitability. It has been done by Gail Hall through various corrective measures. Atlantic Lumber Trader recorded a small profit in the first quarter of 1989 (Roberts & Hendry, 1991). The next step is to put the company on its track by funding its activity. Since the company needs to finance 40 days’ sales on average, the decision to pursue a loan to Maritime Bank is a logical approach.

After the company recovered its ability to earn profit and maintain its efficiency, the owners should think about the longer term. ALT should improve its annual net profit margin. The company can analyze the choices between opening a new line of business, vertical integration, or a capital budgeting project that has a high return and ultimately improve profitability. After the company determines which project will bring the highest return, then the company can start by examining the funding alternatives.

ALT would most likely be unable to gain further loans because it already has poor leverage and liquidity ratios. So, it should consider bringing in new investors to boost the equity. The investor should understand the company’s position and believe that it can significantly improve financially. After the fund is obtained, the company should put more control to ensure the success of the project which will ultimately improve the company’s financial ratios.

Importance and relevance of the Atlantic Lumber Trader case

The skill to analyze a company’s financial position is always important and relevant to business studies. The importance is not only limited to the issue of pursuing a loan but involves all aspects of the business. The case study is not only showing how Lynne Thomas will decide whether to call the loan or not, but how she analyzed every internal and external aspect of the business. From the perspective of the owners, the analyses will be beneficial to evaluating the business and determining strategic planning. As a business student, this case study represents real business issues that typically affect a business with a low margin. The lesson is important and relevant to improve my analytic skill.

References

Brigham, E. F., & Houston, J. F. (2017). Fundamentals of Financial Management (15th ed.). Cengage Learning.

Heisinger, K., & Hoyle, J. B.(2012). Chapter -13 How do managers use financial and nonfinancial performance measures. In Managerial Accounting, 1030 –1129 . Saylor Foundation. https://open.umn.edu/opentextbooks/textbooks/137  licensed under Creative Commons by-nc-sa 3.0.

Rist, M., & Pizzica, A. J. (2015). Financial ratios for executives: How to assess company strength, fix problems, and make better decisions. Apress Publishing.

Roberts, G.S. & Hendry, L.P. (1991). Atlantic lumber traders.  Acadia Institute for Case Studies. Acadia University. https://drive.google.com/file/d/1g5TtbAxd4iBYR3tuJ_p4uftC2E5WE9EV/view?usp=share_link

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