The sales of Clarkson Lumber Company have been steadily increasing during the past three year from 1993 to 1995. Its sales increased 29.97% in 1995. Although the sales growth rate slows down, it still maintains a double-digit growth. The growth rate is 21.71% and 18.71% in 1996 and 1997, respectively. This is because Clarkson Lumber's business has a big portion of repairing business, and the sales are protected to a certain level in an economic downtown. .
Comparing with the industry peers, Clarkson Lumber Company has a much higher inventory. As a percentage of Sales, the inventory is 28.19% in 1994 and 35.88% in 1995, whereas even the bottom 25% contributors have an inventory as low as 12% to the sales. Holding too much inventory may tie up the fund of the company and prohibit those funds from being used elsewhere in the business.
Although suppliers praised Mr. Clarkson for his carefully control on his operation expenses, such control didn't come naturally with the company. The operating expenses from 1993 to 1995 indicate an increasing trend. It increased 15.27% in 1994 and 31.1% in 1995. One significant reason is because Clarkson paid himself more salary. His salary occupied 12% of the operating expense. Clarkson Lumber's net income maintains around 13% growth in 1994 and 1995; however, there is a sharp growth in 1996 and 1997. The net income growth rate reaches as high as 35%. One reason we believe is that Clarkson takes carefully control of operating expense, and slows down the purchases as a percentage of sales. Another reasonable expansion is that, Clarkson makes quantity purchase of material and take the advantage of 2% trade discount. In exhibit 1, we can tell the company enjoys a trade discount $69,000 and $101,000 in 1996 and 1997, respectively.
Clarkson Lumber Company has a shortage of cash because Mr. Clarkson bought out Mr. Holtz's interest in the company in 1994. Although the supplier provide a 2% discount with payment made within 10 days of invoice date.