Jones Electric

Topics: Balance sheet, Accounts receivable, Generally Accepted Accounting Principles Pages: 5 (1540 words) Published: April 6, 2013
Jones Electrical Distribution Electric Suppliers Finance Essay


Jones Electrical Distribution is an Electrical company which has predicted that sales for the company will increase. However, over the years the company has experienced some difficulties in its cash flow and decided that in order to keep the company in operation, it was evident that additional financing would be needed in the form of a loan. However, the loan limit for borrowing could not have exceeded $250,000.00. This amount was the maximum limit their local bank, Metropolitan would offer to any company. It must be pointed out that from the inception of Jones Electrical, Metropolitan Bank was the only financial provider used by the company. In light of the foregoing, Jones had to seek alternative financial assistance from another bank - Southern Bank and Trust. The credit line offered Jones Electrical a loan would be in the amount of $350,000.00, $100,000.00 more than what Metropolitan would have offered. Jones Electrical needed to decide which loan will be more beneficial, less risky and the least expensive for the company. They needed to consider the proposition of receiving the loan from Southern Bank Trust as opposed to remaining with Metropolitan Bank. Another issue arising from the case is the way in which Jones Electrical did its operations. He had over 100 suppliers from which he credited inventory, and he paid his accounts within the 10-day period in order to benefit from a 2% trade discount. The industry being large, fragmented and highly competitive, Jones Electrical had to decide whether they needed to restructure their company’s operation and expand same and also what financial decision that had to be made for the continued operations of the Company. Jones Electrical would have much limitations with respect to borrowing from Southern Bank and Trust such as; additional investments in fixed assets could only be made with prior approval of the bank, consumption of the credit line would have a limit of $350,000 of Accounts Receivable and 50% of Inventory and also, there will be limitations on withdrawals of funds from the business by Jones. Should Jones accept the loan from Southern Bank and Trust, his relationship with Metropolitan Bank will have to be will no longer. (Piper and DeVolder, n.d). A number of factors would be discussed later on in this case which include the financial projections of Jones Electrical. In addition, Jones’ financial statements will be analyzed and we will also look at the sustainability growth for this small company. The cash flow of Jones Electrical will also be addressed in this case.

Problems faced by Jones Electrical Distribution

Jones Electrical needs to decide whether or not it will accept the offer of the loan from Southern Bank and Trust or from the Metropolitan Bank. The company needs to maintain its sales, needs to expand, satisfy its liabilities but would need funding in order to do so.

Some main problems identified in the case:

Jones bought Dave Verdent, his former business partner out for $250,000. 00. His repayment plan was a $2000.00 per month with 8% interest per annum. The interest rate he is paying is relatively high and this means it will take Jones over ten years to repay this loan with an interest payment in excess of $200,000.00 in interest only. Therefore Jones will have to pay approximately $458,400.42 in interest and principal. This occurred because of a fallout Jones had with his partner Dave Verdent over the aggressive growth of the business, which has put the company in financial debt because Jones has to repay Verdent in full for buying out the company.

From the financial information provided in the Balance Sheet of Jones Electrical Distribution it shows that there was an increase in accounts receivables, inventory, property and equipment. This increase would permit an increase also in liabilities and equity to be able to finance the aforementioned assets. On...
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