Dawson Lumber Company Limited

Memo

To:

From

Date:

Subject: NBC is obligated with the decision of reviewing Dawson Lumber limited’s request for acquiring a loan increase in its line of credit for up to 10.8M dollars.

Recommendations: With the fact that Dawson Lumber limited is one of the highest borrowers from the bank, the bank is required to be highly careful with the   management of the associations.

            Dawson company  holds the intention  to the  inventory  financing  as well as  receivables  after  the expansion of their credit  line  by the bank (Humphrey & Pliniussen, 1999).  NBC as the financing  institution  is expected  to  be  cognizant  in regard  to the competitive scope  of the  company’s industry  and  make some evaluations  on the  general retail  scope  to establish  its general benefits  to the strategic plan  held  by Dawson’s. the  relationship  amid  the  two institutions  should be upheld while developing  any  specific  decision  because  the company  is  of much essence to the bank  with the provision  that  it is  amongst the highest  borrowers.  The  bank   in this  situation  cannot  be effective  in  turning down the corporation  but  adequate  assessment  must  be  conducted.  However,  even in the  circumstance the  extension  of  the credit line for  Dawson limited  by the  bank  may lead to a  rise  in the  default  risk  of  the  corporation  thus  affecting  the  capability of NBC in retrieving  the 4.2 dollars  loan which is  owed already.

            Short -term

            Dawson should be consulted for more information on its need for a higher credit.  This is to acquire whether the decision and the interest can be sustained by the bank. This should be followed by an analysis of the corporation’s performance in the interest.  This plan is aimed at ensuring that the reputation of NBC is not affected based on an internal inability to offer services to other borrowers.  Re-evaluation should be conducted on its economic gains and economic opportunities in the market to ensure that there is a guarantee for the repayment.

Long-term

The borrowing and the repayment policies should be re- defined to ensure that there is clarify and increased understanding without affecting the company’s ability to communicate, develop and make decisions in regard to financial expenditure.  The company should also be allowed to implement or develop the current positioning in the industry for increased gains to assure  the bank of its worthiness.

Control and feedback

The bank should for certain period observe the economic response of the corporation.  The success of its economic ventures will be utilized as guarantees for  its ability to  repay the acquired loan  and maintain a suitable reputation.  The structural organization and positioning of the company in the market should also be reviewed.  This will help in the design and implementation of suitable approaches  that will  be essential to the corporation  in increasing its  revenue and capability to  sustain and improve its credit line.

Contingency plan

If Dawson Lumber is not well positioned in the market NBC should not eliminate it given its benefits.  NBC should provide a lower loan or a particular one with some changes in its payment policies to ensure that the banks potential to operate is not affected by financial shortages.  If the corporation disagrees with the developed strategy then a negotiation should take place to settle for a common ground amid the two without affecting any party’s interests and economic objectives.  This may include reducing the repayment period which will facilitate the financial source for the company.

Executive Summary

Situation Overview

Dawson limited was established in 1870’s and its private state has been retained since.  The sales of the corporation have grown in the last three or so years which is pressuring the company in the manner in which it funds its working capital (Humphrey & Pliniussen, 1999).  The situation is fueled by the characterization of seasonal sales which is the norm of the constructing sector.  Back in 1998 September, the corporation undertook a forward integrating approach into the retail sector with an expansion of the hardware sector which acted as a form of stabilization of the present operations.

Problem statement

Assessment of the credit line expansion request by Dawson limited to the retention of a valuable association amid NBC and Dawson limited.

Recommendations /Implementations

Dawson company limited is holds a good reputation and highly beneficial to NBC.  The lumber industry in Canada is, however, unattractive at times.  This is based on the anticipated increased  supply,  high  rate of competition, increased bargaining power  for purchases  which weights  down the  products  prices while  increasing  the  general  cost of operation thus affecting  profitability. With the development of  the  smaller  and medium  producers of lumber  which are  highly involved in the  competition of differentiated  products,  the  market  can be categorized  as a flooded  one.  The  association  of the above stated  factors , as well as the  low  industrial growth,  recently  has  resulted  to the  highest  rivalry  degree  among firms  which  has  thus  set  lumbers  for lower  prices.  While the firms are competing to lower the prices to get a higher consumer share purchasers benefit the most.

The  negotiation authority  has  further  been  fueled  by  holding the highest information  gain with the  presence  of lowered  power  of switching  the existing costs.  The industry is run  with  strict  governmental policies  which  enhances the general authority held by  buyers  thus creating increased  rivalry  in the sector.  Moreover,  based on the starting  high  investment  that was  made  on fixed  assets  and the high expertise  that the sector requires  it is  hard for the  corporations  to leave  the sector  which  intensifies  the competition presence. The retail industry  is additionally  characterized  by  its  own flaws since  the  rate of differentiation is still low   where  the competing  firms  are high in numbers. The market is characterized with high sensitivity for prices which necessitates Dawson to be well positioned.

Dawson limited’s request in growing the existing credit line is one that requires further evaluations based on the matter’s sensitivity.  The bank understands that the expansion of the company into the retail sector presents a high development opportunity. This will additionally be essential in gaining stability and diverting from the seasonal lumber sector which affects its general sales as well as production.  However,  there is justification  that  Dawson limited  is  ignoring  to make a consideration  on  the  transforming  competitive scope  in the market.  An anticipated lumber prices reduction would make the suggestion in the anticipated further sales of lumber.  In addition  Dawson  retail market  is  subjected  from high  competition threat  from established  corporations  which may  affect its selling as well as  profit  gaps.

NBC is required to examine the industry from both sector’s perspective.  The  anticipation  of capital  spending that  is  made  by the corporation  can be considered to be  lower  given the  general  average  that  exists  in both  sectors.  This  shows that  at  last  the corporation  will be  defeated by the competitors  based on the  fact that the manufacturing and the retailing  industries  requires  high  levels of investment  for Dawson  corporation  to be  able to sustain  its  competitive  position  and the associated  gains.

The  main  concern of NBC  should be  grounded  on the anticipations of Dawson to increase  its  inventories which are  already  high  as  compared to those  owned by  competitors.  This will require more period for the corporation to be able to repay the funds.  While  the  corporation  views the  objective of  enhancing  quality  services  through  implementation of differentiation  its expansions are exaggerated because  they  affect  the strategic objective of the management  in stabilizing  the  corporation  via  improving  operations  and  inventories.  This strategy  has  proved  to be a worse  path for those  that  have  taken in  the recent  years based  on innovative  and  more  dynamic  strategies that  are  currently  being utilized.

The objective  of the  corporation to  operate  in this path  may lead  to the shortage  of working capital  that  is necessitated  in  offering support  to  operating  assets,  defending  its position and  acquiring an  advantage  of  the existing market  chances  that  are present  in  both sectors.  Financial  and  economic  evaluation  is a high  necessity   for  NBC in making  decisions that  are favorable  to their relations  with the  company.  The company  can additionally  modify  its   existing policies in regard  to working capital  which will support  the  sustainability  of Dawson limited.   This will offer the guarantee that the company will work in acquiring success in both sectors without fail so that the general operation of the bank is not affected.  These strategies will additionally work in saving both of the institutions reputation.

Exhibit Summary

The sustainability  of Dawson  and  protection of the  relation amid NBC and Dawson  can  best  be  acquired  via  working capital  policies  modification and  evaluating  the  economic and  financial surrounding in the  industry.

Exhibit Summary 1: Working Capital Policies Modification

Dawson holds expansion into the retail  market  offers an  opportunity  for further  development  given that  the  construction sector  is characterized  by  seasonality.  The company can best achieve this through acquiring a higher credit from NBC.  Under the  existing  situations  it is  not  worth  the corporation to acquire more  credit   based  on the fact that  it has been leveraged  for about  99 percent despite the  fact that  it needs a back up of both  inventories as  well as receivables  to operate  in both  markets. NBC is required  to  adopt  more advanced  financing  strategies  which will ensure  that  is  capital  flow  path is  not affected. This requires the imposing of fines to creditors who are leveraged more than 99 percent.  this will  imply that the  acquired  credit  if the company  qualifies based on the economic  analysis  should be  paid  on a reduced  time period.

Exhibit 2: Economic Analysis

 The company has been performing well in the recent which makes its economic status good for acquiring a higher credit. However, this will be affecting the potential of the bank to attend to more firms.  The  company  can work  on  developing its  marketing operations  so that the  inventory  sales  period can  be reduced  for  quicker  generation of  finances.  With  the  frequent generations of  funds this implies that  the  necessity  of acquiring  finances will be lowered by increasing the  ability  to repay  debts  easily  and in short  periods.

 

 

           

 

 

            Reference

Humphrey, J.A & Pliniussen J.K. (1999). Case 3.1 Dawson Lumber Company Limited. Ivey         Management Services. pdf