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Jones Electrical Distribution Case

Introduction
Over the past several years, Jones Electrical has become a very
profitable electric component dealer. Despite these great results, they
have discovered a cash shortage and with sales expecting to rise in
2007, the firm needs to take up more debt in order to support its
development. Jones Electricals current bank is unable to increase
their financing to over $250,000 however they have been given an
offer by Southern Bank & Trust who may extend this line of credit to
$350,000.
Problem
Nelson needs to choose whether he should switch from Metropolitan
Bank to Southern Bank & Trust in order to extend his line of credit.
Furthermore, he needs to consider whether or not to continue with the
trade discount from the suppliers at 2% or if he should instead pay
them after the due date.
Analysis
Jones Electrical has grown very steadily over the years. Sales have
grown every year and between 2004 to 2006 they rose by 38.1% from
$1,624,000 to $2,242,000. Furthermore, sales are projected to
increase to $2,700,000 for 2007. Although profit has been growing
along with sales, the profit margin of Jones Electrical is relativity small
for the amount of revenue it creates. In 2006, the profit margin was at
1.3% and in 2004, the margin was as low as 0.9%. This represents the
firms profitability is not very secure. A single economic downturn
could possibility lead to a negative profit margin for Jones Electrical.
Furthermore, the 41.2% increase in accounts receivable between 2004
and 2006 are some of the reasons behind the decrease in cash, as
fewer clients want to pay cash for the goods. Because of these
receivables, the discount for quick payments has become very hard
which has led to the 233.3% increase in accounts payable between
2004 and 2006.
The decrease in cash is also attributed to using it to fund the higher
amounts of inventory. In 2005, the inventory turnover ratio was 5.53
and there was a reduction in the ratio in 2006 to 4.80. This shows that
Jones Electrical has overestimated their sales for the future and this
has led to a shortage in cash due to unnecessary purchase of
inventory.
The return on assets for Jones Electrical in 2004 was 2.3%, 4.3% in
2005 and 3.8% in 2006. These low values represent the profit per

dollar of assets and these figures mean that Jones does not use the
assets very efficiency. Moreover, return on equity in 2004 was 7.6%,
13.62% in 2005 and 12.35% in 2006. Although the ROE has risen over
the years indicating they have performed better for their shareholders,
a ROE below 15% is still considered low.
To decide Nelsons best course of action, we shall project the financials
of Jones Electricals with and without the use of a trade discount
(Appendix A&B). It was mentioned on page two that sales are
expected to reach $2,700,000 so that will be our assumption of sales.
Recommendations
Based on the income statement and balance sheet created, it is seen
that with the trade discount, Jones Electricals line of credit increases
to $395,000. Without the trade discount, the company has a line of
credit of $310,000 that is significantly less than the $350,000.
Therefore Jones should skip the trade discount and create a
relationship with Southern Bank.
Areas of improvement for Jones Electrical include better purchasing of
their inventory. They have purchased way too much and this is
reflected in the lower inventory turnover ratio. Jones Electrical needs
to purchase inventory in proportion to the increase in sales to raise its
inventory turnover ratio.
Furthermore, Jones Electrical needs to reduce its high levels of
accounts receivable by introducing a stricter credit policy as increase
in accounts receivable is one cause of the decrease in cash.

Appendix A
Income
Statement

200
4

200
5

200
6

Cost of goods sold

162
4
130
4

191
6
153
5

224
2
181
8

Gross Profit on
sales

320

381

424

109

Operating
expenses

272

307

347

94

27

30

31

21

44

46

Provision for
income taxes

15

16

Net income

14

29

30

Year

Sales

Interest expense
Net Income before
taxes

Q1
2007

Assumpti
on

608
499

% of
sales

% of
sales
% of
sales

34% tax

2007 (No trade


discount)

2007 (with trade


discount)

2700

2700

2190

2145

510

555

418

418

35

35

57

102

19

35

38

75

Appendix B
Balance
Sheet
Year

2004

2005

2006

Q1
2007

Cash
Accounts
Receivable
Inventory
Total current
assets

45
187

53
231

23
264

32
290

243
475

278
562

379
666

432
755

Property and
equipment
Accumulated
depreciation
Total PP&E,
net

187

202

252

252

-74

-99

-134

113

103

Total Assets

588

Accounts
payable
Line of credit
payable
Accrued
Expenses
Long term
debt, current
portion
Current
liabiliites

Assumption

2007 (no
trade
discount)
32
318.06

2007 (with
trade
discount)
32
318.06

% of sales

438
788.06

430
780.06

% of sales

302.4

302.4

-142

-174

-174

118

110

128.4

128.4

665

784

865

916.46

908.46

36

42

120

203

180

58

149

214

249

250

310

395

13

14

14

12

constant

14

14

24

24

24

24

constant

24

24

222

294

407

489

528

491

Long-term
debt
Total Liabilities

182

158

134

128

110

110

404

452

541

617

638

601

Net Worth

184

213

243

248

278.46

307.46

% of sales

Total
Liabilities
and net
worth

588

665

784

865

916.46

908.46

Jones electrical offer competitive pricing and they need to keep their
costs low.
Always do a source and application of funds or cash flow statement.
Show where he is getting money and where he is paying money
Growth has brought the need to have higher levels of inventory.
Calculate days sales outstanding
Calculate cost of discount and compare to cost he is going to pay.

Midterm

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Use laptop
Can use the internet
Have to submit it before 9:20 or can email to professor
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