Jones Electrical Electrical Distribution Distribution Case – Introduction Over the past several years, Jones Electrical has become a very proftable electric electric component dealer. dealer. Despite these great results, results, they have discovered a cash shortage and with sales expecting to rise in 200, the frm needs to ta!e up more debt in order to support its development. Jones Electrical"s Electrical"s current current ban! is unable to increase increase their fnancing to over #2$0,000 however they have been given an o%er by &outhern 'an! ( )rust who may extend this line o* credit to #+$0,000. Problem elson needs to choose whether he should switch *rom -etropolitan 'an! to &outhern 'an! ( )rust in order to extend his line o* credit. urthermor urthermore, e, he needs to consider whether or not to continue with the trade discount *rom the suppliers at 2/ or i* he should instead pay them a*ter the due date. Analysis Jones Electrical has grown grown very steadily over over the years. &ales have grown every year and between 200 to 2001 they rose by +.3/ *rom #3,12,000 to #2,22,000. urthermore, sales are pro4ected to increase to #2,00,000 #2,00,000 *or 200. 200. 5lthough proft has been growing growing along with sales, the proft margin o* Jones Electrical is relativity small *or the amount o* revenue revenue it creates. creates. 6n 2001, the proft proft margin was at 3.+/ and in 200, the margin margin was as low as 0.7/. )his represents represents the frm"s proftability proftability is not very secure. secure. 5 single economic downturn downturn could possibility lead to a negative proft margin *or Jones Electrical. urthermore, the 3.2/ increase in accounts receivable between 200 and 2001 are some o* the reasons behind the decrease in cash, as *ewer clients want to pay cash *or the goods. 'ecause o* these receivables, receivables, the discount *or 8uic! payments has become very hard which has led to the 2++.+/ increase in accounts payable between 200 and 2001. )he decrease in cash cash is also attributed to using it to *und the higher amounts o* inventory. inventory. 6n 200$, the inventory inventor y turnover ratio was $.$+ and there was a reduction reduction in the ratio in 2001 2001 to .0. )his shows that Jones Electrical has overestimated overestimated their sales *or the *uture and this has led to a shortage in cash due to unnecessary purchase o* inventory. )he return return on assets *or Jones Electrical in 200 200 was 2.+/, .+/ in in 200$ and +./ in 2001. 2001. )hese low values represent represent the proft proft per
dollar o* assets and these fgures mean that Jones does not use the assets very e9ciency. -oreover, return on e8uity in 200 was .1/, 3+.12/ in 200$ and 32.+$/ in 2001. 5lthough the :OE has risen over the years indicating they have per*ormed better *or their shareholders, a :OE below 3$/ is still considered low.
)o decide elson"s best course o* action, we shall pro4ect the fnancials o* Jones Electricals with and without the use o* a trade discount ;5ppendix 5('<. 6t was mentioned on page two that sales are expected to reach #2,00,000 so that will be our assumption o* sales.
Recommendations 'ased on the income statement and balance sheet created, it is seen that with the trade discount, Jones Electrical"s line o* credit increases to #+7$,000. =ithout the trade discount, the company has a line o* credit o* #+30,000 that is signifcantly less than the #+$0,000. )here*ore Jones should s!ip the trade discount and create a relationship with &outhern 'an!. 5reas o* improvement *or Jones Electrical include better purchasing o* their inventory. )hey have purchased way too much and this is re>ected 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. urthermore, Jones Electrical needs to reduce its high levels o* accounts receivable by introducing a stricter credit policy as increase in accounts receivable is one cause o* the decrease in cash.
5ppendix 5 Income Statement 200
200 $
200 1
Aost o* goods sold
312 3+0
373 1 3$+ $
22 2 33
Bross Croft on sales
+20
+3
2
307
Operating expenses
22
+0
+
7
2
+0
+3
23
1
Crovision *or income taxes
3$
31
2
et income
3
27
+0
$
?ear
&ales
6nterest expense et 6ncome be*ore taxes
@3 200
5ssumpti on
10 77
/ o* sales
/ o* sales / o* sales
+/ tax
200 ;o trade discount<
200 ;with trade discount<
200
200
2370
23$
$30
$$$
3
3
+$
+$
$
302
37
+$
+
$
5ppendix ' Balance Sheet ?ear
200
200$
2001
@3 200
Aash 5ccounts :eceivable 6nventory )otal current assets
$ 3
$+ 2+3
2+ 21
+2 270
2+ $
2 $12
+7 111
+2 $$
Croperty and e8uipment 5ccumulated depreciation )otal CC(E, net
3
202
2$2
2$2
77
3+
33+
30+
Total Assets
$
5ccounts payable ine o* credit payable 5ccrued Expenses ong term debt, current portion Aurrent liabiliites
5ssumption
200 ;no trade discount< +2 +3.01
200 ;with trade discount< +2 +3.01
/ o* sales
+ .01
+0 0.01
/ o* sales
+02.
+02.
32
3
3
33
330
32.
32.
11$
1$
731.1
70.1
+1
2
320
20+
30
$
37
23
27
2$0
+30
+7$
3+
3
3
32
constant
3
3
2
2
2
2
constant
2
2
222
27
0
7
$2
73
/ o* sales
ongterm debt )otal iabilities
32
3$
3+
32
330
330
0
$2
$3
13
1+
103
et =orth
3
23+
2+
2
2.1
+0.1
Total Liabilities and net worth
$
11$
1$
731.1
70.1
Jones electrical o%er competitive pricing and they need to !eep their costs low. 5lways do a source and application o* *unds or cash >ow statement. &how where he is getting money and where he is paying money Browth has brought the need to have higher levels o* inventory. Aalculate days sales outstanding Aalculate cost o* discount and compare to cost he is going to pay.
idterm
=ill be a case Fard copy Gse laptop Aan use the internet Fave to submit it be*ore 7H20 or can email to pro*essor )yre Aity and Jones I about a company where you analyse how businsess is doing. )arget I capital budgeting process. Fow to manage approval o* capital investment re8uests. 5lligator Deutsche I Dividends. Do the shareholders rely on it.
Fill country I capital structure problem. Aase may be related to 5;pro4ections<, capital structure or capital budgeting;capital expenditure<. Ahec! out alliagator
