Introduction

Financial health is a very critical aspect of measuring the success of any business and

as such leadership should always strive to ensure that their finances are in good shape.

Financial health determines the overall profitability of the company. According to Heisinger

& Hoyle (2012), there are several metrics that can be used to measure this financial health

and these include operational efficiency, which is a way of measuring a company's

operational profit after taking into account the variable costs of operation; solvency, which

measures a company's ability to meet its short-term and long term debt obligations; liquidity,

which measures a company's cash and assets that are easily convertible to cash in order to

assess its ability to survive in the short term.

Background of the case.

Atlantic Lumber Traders (ALT) was founded in 1993 by two siblings, Edward and

Gail Hall, in Saint John, New Brunswick. The Hall family had been in the timber and lumber

industry for quite a long time and enjoyed significant influence in the New Brunswick

market. ALT is spread to four Atlantic provinces which account for over 80% of ALT's

lumber sales, followed by Quebec and Ontario at 19% and the United States at 1%. Before

founding the ALT, Edward and Gail both practiced law and decided to continue doing so

after starting ALT and they engaged a third stakeholder, David Lawson, who was primarily in

charge of the management and operations of the business (Roberts & Hendry, 1991).

Description of the case.

The company has enjoyed successful operations almost every year since its inception in 1983,

but it experienced huge financial losses in late 1987 and 1988 as a result of poor

management, poor employee performance, and poor financial choices (Roberts & Hendry,
1991). The Hall siblings bought Lawson shares in October 1988 and Gail made the decision

to take over ALT and lead the business in the right direction and the following actions were

taken.

 reducing the workforce from 11 to 6.

 putting in place a straightforward and efficient internal accounting program.

 reorganizing sales commission for sales staff; and (4) lowering inventory levels from

$500,000 to $850,000 to under $150,000.

In the first quarter of 1989, ALT was able to turn a small $16,000 profit. Gail believed that

the company's first-quarter performance was a solid step in proving to its creditor, Maritime

Bank, that ALT was on the righteous trajectory to restoring profitability (Roberts & Hendry,

1991). Additionally, she approached the bank to persuade them to expand the credit facility in

order to free up ALT's limited operating capital and enable higher sales. The bank's credit

assistant Lynne Thomas was responsible for examining ALT's file, assessing Gail's proposal,

determining the company's long-term viability, and providing advice to the bank (Roberts &

Hendry, 1991).

The real, root problem of this case

 At the close of the fiscal year 1988, the corporation's debt-to-equity ratio was 17:1. The

ratio became 4:1 following the bank injected loan, and in any case, this position reveals

the company's low solvency and incapacity to cover its debt obligations. (Roberts &

Hendry, 1991).

 The industry's intense rivalry and low-profit margins would make it even harder for the

company to turn around its financial situation (Roberts & Hendry, 1991).

 Its financial statement for the fiscal year ending 1988 indicates that operating losses

amounted to around $220,000, and net losses came to about $174,000 on total revenue of
 $17 million. This development exposed the company's management's lack of cost control

and caused serious concern among bank executives (Roberts & Hendry, 1991).

 The current ratio was 0.83 at the year-end of 1998, while the industry average was 1.50.

 The profit-margin ratios were way low below the 2.30 industry standard which is a

concern (Roberts & Hendry, 1991).

 The gross margin ratios were 4.78, 4.82, 4.87, and 4.50, respectively, from 1985 to 1988.

They were all below the sector average of 5.0. The lumber trading company relied on

modest gross margins of 5% to 6%, therefore controlling costs was essential to success.

 Bad debts increased nine times, from 0.01 percent in 1987 to 0.09 percent in 1988. Bad

debts were the main source of risk in the lumber dealing industry since they might lead to

bankruptcy (Roberts & Hendry, 1991).

 The interest expense has risen dramatically growing by 74.19 percent between 1986 and

1987, and 319.35 percent in 1988 when compared to the base year of 1985.

 Additionally, salaries have increased significantly increasing by 132.35 percent in 1986,

310.78 percent in 1987, and 379.41 percent in 1988 when compared to the base year of

1985 (Roberts & Hendry, 1991).

 With the company's workforce reduced from 11 to 6, the bank's prediction for ALT's

financial performance for year-end 1989 painted a grim picture of profitability. Further,

an anticipated slowdown further worsened the situation.

 The trading of lumber was an extremely competitive industry. Nearly 80% of the

company's total lumber sales were in the Atlantic provinces, where ALT held a 5%

market share (Roberts & Hendry, 1991).

Fundamental Cause
 The owners' delayed involvement led to a lack of oversight and control over the

company's costs and sales practices (Roberts & Hendry, 1991).

 The company needed a significant amount of cash to finance its clients' purchase orders

because mills and consumers had different payment dates (Roberts & Hendry, 1991).

 Inadequate Human Resources Management by the previous management of the

organization.

 David Lawson made risky decisions to profit from fluctuating market prices, which led to

a huge loss and a sharp increase in inventory (Roberts &Hendry, 1991).

Possible Alternatives

Gail Hall could use the following option to enhance Atlantic Lumber Traders' overall

financial performance and health and to meet the company's funding requirements:

 Debt restructuring- this involves Gail getting the bank to agree to lower loan interest

rates or arrange longer payment due dates for the company's commitments, or both

(Heisinger & Hoyle, 2012). This could reduce the debt-equity ratio and increase the

likelihood that the business will fulfill its financial obligations and continue operating.

 She might alternatively consider debt consolidation which involves refinancing the

current debt by taking out one loan to pay off many current loans. She could consider

other lending sources and cover the existing loan to target a $4.5 million increase in

sales for the company, enhancing its solvency (Heisinger & Hoyle, 2012). To keep

costs in check and ensure profitability, Gail should expressly outline its corrective

action plan to the bank.

 She can now seek out private investors who will be subject to fewer restrictions and

formalities to assist in financing the company's operations and growth.

Recommended Plan of action

The small improvement in the company's financial health following her involvement in

management shows that Gail Hall's method of creating her strategy was somehow sound

(Roberts & Hendry, 1991). I would like to recommend the following strategies for

implementation.

 The Halls needed to assume leadership of the company and create a strong

management team with a defined strategy and achievable goals.

 ALT might consider expanding its customer base. The United States may be a

potential option because it was expected that by the end of 1989, the Canadian dollar

will fall to about $.81 meaning the cost of Canadian products would be lower.

 Decrease collection period- Gail could revisit the credit conditions with their clients to

reduce risk and raise payment demands. She could demand a portion of the total

payment as a deposit or offer discounts for early payment or late payment penalties.

 Because the average gross margin and profit margin for the sector was 5% and 2.3

percent, respectively, success depended on keeping costs down and managing

operations well. Among ALT's main areas for cost reduction and control were payroll,

bad debts, interest, and inventory management.

 Gail should oversee creating the company's effective management procedures and

policies because she has the greatest expertise in the family. These procedures and

policies should be based on proven strategies and workable plans to achieve the

company's objectives. The management of the organization should investigate

expanding its served areas outside of the Atlantic region in order to lessen the fierce

rivalry and provide more opportunities for increased profit generating.

The importance and relevance of the case to the study of business

The case of Atlantic Lumber Traders (Roberts & Hendry, 1991) dealt with how a financing

bank evaluated the viability of a company's financial future and the plausibility of a

borrowing company's loan restructuring proposal to decide the best course of action for the

bank after the borrowing company experienced severe financial difficulties and tried to make

changes to turn things around. The case illustrates how poor management choices, and a lack

of responsibility may undermine a company's financial performance and jeopardize its long-

term viability, this case is significant. Additionally, it emphasizes the importance of

managerial and financial accounting as tools for analysing, diagnosing, and enhancing a

company's financial performance.

References

Acadia Institute for Case Studies. Acadia University. Retrieved from

https://my.uopeople.edu/pluginfile.php/1276312/mod_book/chapter/283964/
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Collins, K. (2012). An introduction to business. Creative Commons by-NC-sa 3.0 license.

https://2012books.lardbucket.org/pdfs/an-introducti on-to-business-v2.0.pdf

Heisinger, K., &Hoyle, J. B. (2012). Managerial accounting. Saylor Foundation.

https://open.umn.edu/opentextbooks/textbooks/137

Roberts, G. S. & Hendry, L. P. (1991). Atlantic Lumber Traders. Acadia Institute for
Case Studies. https://web.archive.org/web/20190608132458/http://aics.acadiau.ca/
case_studies/atlanticlumbertraders.html
Saylor Foundation. Licensed by Creative Commons by-nc-sa 3.0. Retrieved from
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