Discuss the importance and relevance of the case to the study of business.

Respond to the 3 following discussion posts separately with separate reference lists.
1. [Simon Stewart] Identification of the problem
This post will cover the Atlantic Lumber Traders (ALT) case. The core problems faced by ALT occurred in 1988 (Roberts & Hendry, 1991):
The important loss of $174K in 1988
The high debt to equity ratio of 17:1
Inability to sustain any further losses
Cause of the problems.
Selling policies. David Lawson, who managed the company until 1988, in order to satisfy customers sold lumbers in irregular lots rather than following the usual practice of selling full lots (Roberts & Hendry, 1991). This caused an important increase in stock that would have been difficult to sell. In fact, due to this practice, ALT had to write-down its inventory.
Too many non-revenue generating employees. In 1988 there were 11 employees of which 6 of office staff and 5 salesmen (Roberts & Hendry, 1991). This caused an important increase (+$252K, +106%) in salaries from 1986 to 1988. This % increase in salaries between 1986 and 1988 was considerably higher than the increase in sales that was of a mere 34%. This meant that salaries costs were growing at a much quicker rate than sales, eroding ALT’s gross profit. In fact, in 1986 salaries were 1.89% on sales, in 1988 2.9%. That may not seem very much, but for a company with such small gross profit margins (≈5%) it is a lot.
Prescribe possible alternatives.
Stop selling irregular lots and decreasing as much as possible fixed costs.
Plan of action recommendation.
Stop selling irregular lots by prohibiting salesman to do so unless there is the certainty those remaining irregular lots will bill sold very quickly.
As Gail, David’s successor, did, I would try to reduce salaries as much as possible and make them as variable as possible. This means first of all understanding why 6 office employees were needed. For such a small company one employee in administration and one that has a transversal role (customer service, overall bureaucracy) may be enough. In order to generate again profit, salesman would get a 1.5% gross commission on sales, and the two office employees would cost $40K each. Assuming in 1989 $10Mil in sales, total salaries costs would be 230K ($150K of commissions to salesmen + $80K of office staff). This would allow to reach operating profit, appear healthier towards banks, access more capital hence allowing growth. A 3-year ramp up assuming a 30% growth in sales year over year, 5% GP margin, salaries costs as described above, and 2% of other costs on sales could be as follows:
From year one ALT would start generating some operating income, then it will go better and better because the $80K of the two office employees are fixed (assuming they don’t get pay rises).
Discuss the importance and relevance of the case to the study of business.
It is important because it makes the reader reflect on how just a few bad decisions without forecasting their impacts can turn a profitable business in an unprofitable one.
Roberts, G.S. & Hendry, L.P. (1991). Atlantic lumber traders. Acadia Institute for Case Studies. Acadia University.
2. [Valerie Hubis] Identify the Problem
Atlantic Lumber Traders are facing a problem with working capital. According to Li et al. (2014), working capital refers to the difference in current assets and current liabilities in an organization, which affects the organization’s performance. The low working capital of the company creates a need for additional funds to compensate for a shortage of funds. Atlantic Lumber Traders is experiencing operating loss and net losses in the organization.
Causes for the Problem
The cause of the working capital problem in Atlantic Lumber Traders is due to the lack of cash flows. The cash flow limitation is a result of different factors. The company experiences delays in its accounts receivable due to poor inventory management, affecting sales of the products. Also, the company faces a working capital problem since it has high liquidity, thus failing to increase its profits due to the debt to equity ratio of the company. Atlantic Lumber Traders maintains its operations with debts that have high interest rates (Roberts & Hendry, 2012).
Possible Alternatives and Recommendations
The company can improve its working capital by promoting the organization’s sales. One recommendation to increase sales is by offering credits and discounts for its products (Heisinger & Hoyle, 2012). The company should also improve its inventory management and reduce expenses to promote adequate cash flows.
The company should not continue borrowing the additional cash since it will affect the ability to pay the interest and dividends in the future. Low working capital leads to the consumption of loans with high-interest rates (Li et al., 2014). Companies with cash flow problems should enhance their cost management strategy. Improving cost management strategy will help improve the cash flow by enhancing an efficient inventory and reducing the delays in accounts receivables. The increase in the ROA, ROE, and invested capital compared to other high profit outlets will demonstrate a change in its working capital (Heisinger & Hoyle, 2012).
Importance of the Case
The study enhances the understanding of the different aspects of an organization’s operations, finances, management, and cost accounting. Improving inventory management, adopting technology in the accounting process, and meeting the debt obligations can enhance organizational performance and ensures that the business maximizes profits.
Heisinger, K., & Hoyle, J. (2012). Managerial Accounting. Saylor Foundation.
Li, C.-guo, Dong, H.-min, Chen, S., & Yang, Y. (2014). Working Capital Management, corporate performance, and strategic choices of the wholesale and retail industry in China. The Scientific World Journal, 2014, 1–15.
Roberts, G.S. & Hendry, L.P. (1991). Atlantic lumber traders. Acadia Institute for Case Studies. Acadia University.
3. [ Julianna Mimande ]Introduction
In the field of management studies, accounting plays an integral role in the measuring, tracking, planning, and operation of any business. The two main fields of accounting are financial and managerial, with the former advising both internal and external stakeholders on the condition of the business, and the latter informing internal stakeholders such as operational decision-makers (An introduction to business, 2012). As businesses face environmental challenges, it is valuable to understand the role of accounting, including understanding financial statements and trend analysis, competitor analysis, and financial ratios in order to make informed and strategic decisions (Heisinger & Hotel, 2012).
Atlantic Lumber Traders
Established in 1983 by Edward and Gail Hall, Atlantic Lumber Traders (ALT) is a wholesale lumber provider that sources raw materials from local mills and sells them to outlets, general contractors, and large end-users (Roberts, 1991). After four years of increasing sales, the company began showing an operating loss which prompted to Gail take a more active part in the management of the company by making some aggressive changes and engaging with their bank to address ALT current market position, debt, and plans for moving forward. Lynne, the bank representative charged with the account assessed the company using a combination of financial accounting and anecdotal information known to the bank and provided by Gail.
Financial Problems at ALT
In the fifth year of operation, ALT saw an operating loss of $219,666 and a net loss of $174, 216 on $17 million in sales. Also, high inventory levels totaling $600,000, including difficult-to-sell irregular lots, were above acceptable limits. Finally, the high debt-to-equity ratio left ALT in a vulnerable market position considering the competition was aggressive in the area (Roberts & Hendry, 1991).
Root Cause of the Financial Problems
Gail and Edward had relied on David Lawson, ALT’s manager, more than they should have during the first years of business, thereby missing key financial indicators that there were several issues with operating practices. Speculation purchasing by David overshot the industry-standard inventory levels of $200,000 by $400,000, putting the business in an unmanageable debt-to-equity ratio. David had increased staffing levels in the office to a ratio not sustainable to the sales volume. And finally, by selling irregular lot sizes, against the industry standard, David left the company with a surplus of less popular lots, making them difficult to sell (Roberts & Hendry, 1991).
Action Plan for ALT
As Gail focused more on the ALT accounting, the operational issues became clear, and she immediately began to make the required adjustments using trend analysis. Trend analysis allowed Gail to analyze the company data over time using trend percentage as an indicator of success (Heisinger & Hoyle, 2012). Given the Halls’s reputation in the area, Gail was able to leverage its credibility to maintain a strong brand and competitive advantage while she adjusted. She immediately reduced staff to a more realistic sales-per-employee ratio (Johnston, 2017), made an inventory ‘write-down’ to reduce the inventory losses, and put forth personal guarantees to offset the debt-to-equity position.
Using trend analysis is an important part of financial management. As Gail learned, increasing sales does not always mean increasing profit. It is important to understand how to analyze and interpret financial statements to help direct day-to-day operations as well as a long-term strategy. Key financial indicators including trend analysis, competitor analysis, and financial ratios will support practical decision-making (Heisinger & Hoyle, 2012). In the case of ALT, monitoring management efficiency ratios such as employee per sales ratio would have prevented high labour costs before they became an issue. Further to that, tracking the debt-to-equity ratio could have prevented the high inventory that became a burden to the company.
An introduction to business. (2012, December 29). Lardbucket.org. Licensed under Creative Commons by-nc-sa 3.0
Heisinger, K., & Hoyle, J. B.(2012). Chapter -13 How do managers use financial and nonfinancial performance measures. In Managerial Accounting, 1030 –1129 . Saylor Foundation. licensed under Creative Commons by-nc-sa 3.0.
Johnston, K. (2017, November 21). Employee sales vs. cost ratio. Small Business – Chron.com. Retrieved April 30, 2022, from
Roberts, G.S. & Hendry, L.P. (1991). Atlantic lumber traders. Acadia Institute for Case Studies. Acadia University.

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