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Jones Electrical Distribution

Introdution:
Jones Electrical Distribution In the past several years, Jones Electrical Distribution is profitable, but it is in the condition of cash shortage. With its 2007s sales go up, Jones need borrow more money to help its rapid development. Then he got a maximum line of credit $350,000. With our analysis report, we help Jones to choose whether to take advantage of 2% trade discount, we can observe that Jonescredit line will be $318,000 without discount, not $387,000 with this 2% discount. Problems Statement Jones Electrical Distributions c urrent condition is not only cash shortage but also under rapid sales grows effect. Why this profitable firm needs to increase its borrowing, what kinds of strategies Jones Electrical Distribution will choose, and what his estimate of the loan needs is. These are the problems we will talk about bellows.

Data Analysis 2004 Return On Assets Retorn on Equity 2.34% 2005 4.32% 2006 3.83% 2007 3.84% 2007 8.66%

7.46%

13.49%

12.35% 12.75%

24.62%

Invento 5.37 ry Turnov er Quick Ratio Workin g Capital Turnov er 2.14 6.42

5.53

4.80

4.80

4.80

1.91 7.16

1.64 8.67

1.50 9.99

1.65 8.60

1. According to the balance sheet and sources and uses statements (exhibit 1), we can see that the line of credit payable increases every year, because Jones needs more and more funds to support the needs of working capital and invest to long-lived assets such as plant, property and equipment to support higher sales levels. We can see that Jones used its profits (changed in Net Worth), cash and short-term debt to support the needs of working capital and the increase of

inventory (probably to support higher sales levels). The reduction in long-term debt is a use of funds because Jones is repaying a loan. The decrease of cash is a source of funds to support a higher amount of inventory and prepare to repay the loan. The increase of total net property, equipment and accumulated depreciation is a use, which means Jones used its sources to invest more on plant, property and equipment.

2. Jones Electrical Distribution faces a rapid sales growth but meets the over inventory accumulated. Its Inventory turnover ratio in 2006 is down by 4.80 from 5.53 in 2005(see exhibit 3 for data). It shows that less liquidity in inventory transitions. Previous failure sales prediction is one important reason which cause its cash shortage, less inventory transitions and extremely increasing in payable outstanding. This is also why this profitable firm needs to increases its borrowing. It needs this borrowing to adjust his rapid developing.

4. According to the pro forma statement (exhibit 2) and ratio analysis, they are usually taking advantage of the trade discounts that makes them face a shortage of cash. They also have a huge amount of money invest in inventory, however, the collect of their accounts receivable is much later (43 days) than the pay of their accounts payable (10 days when 2% discount is taken). So this profitable firm needs to increase its borrowing.

5. From the data analysis we can see that the working capital turnover without take discount is higher than the working capital turnover with 2% discount taken, that means Jones is generating a lot of sales compared to the money it uses to fund the sales. In 2007, Southern Bank & Trust, will issue him a maximum amount of $350,000. If Jones does take the 2% discount offered by suppliers, it will dramatically increasing its accounts payable and draw the credit line to $387,000. However, if Jones does NOT take the 2% discount, the line of credit payable will maintain in $318,000, which is lower than $350,000. Besides, Southern Banks & Trust can issue a loan of $350,000 which is ideal for his business, Jones should forgo this 2% trade discounts and develop a long-term debt relationship with Southern Bank & Trust.

6. In order to succeed, Jones must keep their costs down and try to increase their sales, reduce their inventory. They also have to collect their account receivable more efficiency.

Solutions
According to the pro forma statements (exhibit 2), Jones should take

the strategy that is rapid sales growth -- forgo trade discounts -- large need for financing -- debt finance -- longterm debt. According to the pro forma statement (exhibit 2) and the strategy Jones take, it needs about $318,000 of loans.

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