STRUNK LUMBER COMPANY
Following a rapid growth in its business during the preceding several years, the Strunk Lumber Company in the spring of 2020 anticipated a further substantial increase in sales. In order to finance this increase and at the same time to continue taking purchase discounts, the company sought an additional bank loan of $600,000. The company had already borrowed $300,000 from the Sutter National Bank, that amount being the maximum which that bank would lend to any borrower. It was necessary, therefore, to go elsewhere for additional credit. Through a personal friend who was well acquainted with one of the officers of a large metropolitan bank, the First City National Bank, Mr. Strunk, the sole owner of the Strunk Lumber Company, obtained an introduction to the officer and presented his request. The credit department of the First City National Bank made its usual investigation of the company for the information of the loan officers.
The Strunk Lumber Company was founded in 2009 as a partnership of Mr. Strunk and Mr. Henry Smith, a brother-in-law of Mr. Strunk. Six years later, on January 1, 2016, Mr. Strunk bought out Mr. Smith’s interest and incorporated the business.
The business was located in a suburb of a large Midwestern city. Land and a siding were leased from a railroad. Terms of the lease permitted cancellation by either party upon 30 days’ notice. Two removable sheet metal storage buildings had been erected by the company. Operations were limited to the wholesale distribution of plywood, mouldings, and sash and door products to small contractors in the local area. Credit terms of 1% 30, net 60 days on open account were usually offered customers.
Sales volume had been built up largely on the basis of aggressive price competition made possible through careful control of costs and operating expenses and by quantity purchases of materials at substantial discounts, generous credit terms and a high inventory service level. Almost all of the mouldings and sash and door products, which amounted to 40% and 20% of sales, respectively, were used for repair work. About 55% of total sales were made from March through August. No sales representatives were employed, orders being taken exclusively over the telephone. Comparative operating statements for the years 2016 through 2019 are presented in Exhibit 1. Comparative balance sheets are presented in Exhibit 2.
Mr. Strunk was an energetic man, 39 years of age, who worked long hours on the job, taking care not only of management but also performing a large amount of the clerical work. Help was afforded by an assistant who, in the words of the investigator of the First City National Bank, “has been doing and can do about everything that Mr. Strunk does in the organization.”
Mr. Strunk had adopted the practice of distributing bonuses to employees at the end of each year. In 1999 the bonus amounted to 40% of annual wages. In addition, Mr. Strunk was planning to sell stock to certain employees.
This case was adapted from one prepared by David F. Hawkins, Harvard Business School, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
As part if its customary investigation, the First National City Bank sent inquiries concerning Mr. Strunk to a number of firms which had business dealings with his. The manager of one of his large suppliers, The Cotter Company, wrote in answer:
The conservative operation of his business appeals to us. He has not wasted his money in disproportionate plant investment. His operating expenses are as low as they could possibly be. He has personal control over every feature of his business and he possesses sound judgment and a willingness to work harder than anyone I have ever known. This, with a good personality, gives him an excellent turnover and from my personal experience in watching him work, I know that he keeps close check on his own credits.
All of the other trade letters received by the bank bore out the statements quotes above.
In addition to the ownership of his lumber business, Mr. Strunk held jointly with his wife an equity in their home, mortgaged for $195,000, and which cost $420,000 to build in 2010. He also held a $1,500,000 life insurance policy, payable to Mrs. Strunk.
The bank’s analysts prepared the spread sheet of financial ratios for Strunk Lumber Company shown in Exhibit 3. The bank gave particular attention to the debt position and current assets and current liabilities of the business. It noted the ready market for the company’s products at all times and the fact that sales prospects were particularly favorable. The rate of inventory turnover was high, and losses on bad debt in past years had been quite small.
The bank learned, through inquiry of another lumber company, that the usual terms of purchase in the trade were 2% 10, net 30 days after arrival.
Mr. Strunk hoped to use the additional bank loan to pay off his debts to his trade creditors, earn the two percent purchase discount that most of his vendors offer, and expand his business.
Questions
1. What is Mr. Strunk’s business strategy? How does he plan to make sales, keep his costs as low as possible, and use his capital?
2. How successful has Mr. Strunk been in achieving this strategy?
3. How have the financial and operating characteristics of Mr. Strunk’s business changed over the periods covered by the financial statements presented in the Exhibits?
4. How has Mr. Strunk financed his business in recent years?
5. What has Mr. Strunk done with the financial resources he has obtained?
6. Would you give Mr. Strunk the additional loan he requests?
7. What changes do you recommend Mr. Strunk make in his operating and financial strategy?
