Jones Electric Distribution

Topics: Balance sheet, Financial ratios, Accounts receivable Pages: 7 (1504 words) Published: September 12, 2011
Mr. Jones,
A recent evaluation of Jones Electrical Distribution has occurred in request of a loan. An assessment of the company’s financial health shows that it is profitable. The shortage in cash flows regards managerial attention. Since Jones opened in 1999 the company has seen rapid growth in a highly competitive field. General contractors and electricians have preferred Jones for their business. The request for this loan also has occurred at the end of March; past patterns show that your company is seasonal, with most sales occurring in spring and summer months. Previously stated facts estimate that sales will gradually increase. If managed properly Jones has potential to develop, grow, and add additional sites in the future. Internal and external references about Jones engineering have been beneficial in consideration for a loan. II. Problem Statement

Recently the continued growth in sales has raised accounts receivable and inventories considerably. This decrease in inventory turnover has caused accounts payable to rise due to heavy reliance on credit from suppliers. There are many ways in which you can lower the size of the line of credit needed. Good management can lower the credit line needed by lowering the inventories and accounts receivables, which grew in 2005 and 2006 because Jones is trying to increase production and growth by pushing the products to the customers. In 2003 Nelson Jones was involved in an argument with his partner Dave Verden and Jones agreed to buy out his partner for $250,000, paying him $2,000 a month with an 8% per year interest rate. It will take Jones 10.83 years to pay back his old partner. Having that extra expense will decrease his monthly income requiring him to retain a higher loan amount. Since the market for Jones Electrical Distribution is fragmented, Jones is trying to increase its inventory. Inventory turnover ratio for 2005 is (1535/278=5.52) and for 2006 is (1818/379=4.79). It shows that Jones has been overconfident in their predictions. Increasing the inventory is a reason that the company is facing cash money shortage. All of these have dramatically increased day’s payable out standing. In past history Jones took advantage of a 2% discount if supplies were fully paid off tens days upon purchase. With the growth of business and the decrease in Cash Flows, payments for supplies exceed the discount period. The discount that is disregarded only increases the accounts payable and further decreases cash flow. In 2006 Metropolitan Branch Bank issued a loan of $250,000 to Jones in order to finance its growth in sales. Heavy credit dependency on suppliers will continue to draw request for larger loans and Jones must keep its line of credit at a lower rate to increase cash flows. The risk in issuing a $350,000 loan with a company of Jones size could be decreased in hope of creating a long term relationship. Also, the company has also lowered the Cash Conversion Cycle from 100.12 days (during 2005) to 95.01 days (during 2006). In 2005, days payable outstanding was around ten days and fell under the discount agreement with suppliers. In 2006, the number of days it was taking Jones to repay its suppliers had increased to 24. The nominal cost lost in forgoing the discount was 37.2% of cost of goods sold, or $67,600. The first quarter in 2007 shows another increase in sales with another increase of accounts payable. Certain changes or improvements should be made to ensure future stability. III. Assessment

Changes to the line of credit could be made or agreed upon. Jones Electrical Distribution should re-evaluate a deal with suppliers for a 1% discount and a twenty day time frame of eligibility. The line of credit can be lowered also by using a home equity loan in which Mr. Jones home is put up for collateral if he fails to make the payments. The line of credit you receive would be the net worth of your house minus the mortgage amount left on your home, which...
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