MEMO RE CLARKSON LUMBERTO: John DoePresident, Northrup National BankDE: George DodgeLoan Officer, Northrup National BankClarkson Lumber Company is owned and operated by the hard-working 49-year-old Mr. Clarkson. Its operating expenses are low, its staff small and its management strong. The overall impression is that of a conservative and efficient operation. Clarkson himself lives a frugal life with little personal debt. Clarkson Lumber is a rapidly growing company but with a constant cash flow crisis. This is not an unusual convergence, but it requires some financial decisions. Their current state of underfunding makes a number of their ratios appear poor. There are several reasons for Clarkson Lumber's cash flow problems. One of them was Mr. Clarkson's decision in 1994 to buy out the shares of his partner, Mr. Holtz. The note had 4 semi-annual payments of $50,000 beginning June 30, 1995 with an interest rate of 11%. Clarkson Lumber is not generating enough profit to pay off this debt in such a short time. Basically, the terms of debt repayment do not match the financial strength of the company. To date, there are 2 payments remaining on this note, June 1996 and December 1996. The $399,000 borrowing capacity cap imposed on the company by Suburban National Bank is consistently insufficient to meet its growing needs . Sales increased from $2,921,000 in 1993 to $4,519,000 in 1995. This is a 54% increase. Additionally, Clarkson demonstrated the ability to stay within Suburban's $400,000 limit by relying solely on trade credit. Additionally, from their financial statements, it appears that they made significant property purchases in 1995 ($126,000). They financed them thanks to their revolving loan. Presumably this expense is a result of their sales increasing significantly, but it is generally not a good cash flow management strategy to use short-term debt to purchase long-term assets. If we look at a number of key ratios for Clarkson Lumber, clear issues emerge. Their debt-to-equity ratio increases due to the increase in debt. In 1993, the debt ratio was 0.45. In 1994 it was 0.68 and in 1995 it was 0.73. It's a trend Clarkson will need to consider when refinancing his business..