Jones Electri
Jones Electrical Distributcal Distribution Case –ion Case – Introduction
Introduction
Over the past several years, Jones Electrical has become a
Over the past several years, Jones Electrical has become a veryvery proftable electr
proftable electric component dealeric component dealer. . Despite these great rDespite these great results, theyesults, they have discovered a cash shortage and
have discovered a cash shortage and with sales expecting to rise inwith sales expecting to rise in 200, the frm needs to ta!e up more debt in order to support
200, the frm needs to ta!e up more debt in order to support itsits development.
development. Jones ElectricalJones Electrical"s curre"s current ban! is unable to int ban! is unable to increasencrease their fnancing to over #2$0,000 however they have been given an 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 o%er by &outhern 'an! ( )rust who may extend this line o* credit to #+$0,000.
#+$0,000. Problem Problem
elson needs to choose
elson needs to choose whether he should switch *rom -etropolitanwhether he should switch *rom -etropolitan 'an! to &outhern 'an! ( )rust in order to extend his line o* credit. 'an! to &outhern 'an! ( )rust in order to extend his line o* credit. urthe
urthermorrmore, he e, he needs to consider needs to consider whether or not to whether or not to continue with thecontinue with the trade discount *rom the suppliers at 2/ or i* he should instead pay trade discount *rom the suppliers at 2/ or i* he should instead pay them a*ter the due date.
them a*ter the due date. Analysis
Analysis
Jones Electrical has gr
Jones Electrical has grown very steadily ovown very steadily over the years. er the years. &ales have&ales have grown every year and between 200 to 2001 they rose by +.3/ *rom grown every year and between 200 to 2001 they rose by +.3/ *rom #3,12,000 to
#3,12,000 to #2,22,000. #2,22,000. urthermore, urthermore, sales are sales are pro4ected topro4ected to increase to #2
increase to #2,00,000 *or 20,00,000 *or 200. 0. 5lthough proft has been gr5lthough proft has been growingowing along with sales, the
along with sales, the proft margin o* Jones Electrical is relativity smallproft margin o* Jones Electrical is relativity small *or the amount o* reve
*or the amount o* revenue it createnue it creates. s. 6n 2001, the pr6n 2001, the proft margin was atoft margin was at 3.+/ and in 200, the mar
3.+/ and in 200, the margin was as low as 0.7/. gin was as low as 0.7/. )his repr)his represents theesents the frm"s prof
frm"s proftability is not very setability is not very secure. cure. 5 single economic downtur5 single economic downturnn could possibility lead to a
could possibility lead to a negative proft margin *or Jones Electrical.negative proft margin *or Jones Electrical. urthermore, the 3.2/ increase in accounts receivable between 200 urthermore, the 3.2/ increase in accounts receivable between 200 and 2001 are some o* the reasons behind the
and 2001 are some o* the reasons behind the decrease in cash, asdecrease in cash, as *ewer clients
*ewer clients want to pay cash *or want to pay cash *or the goods. the goods. 'ecause o* these'ecause o* these receiv
receivables, the discount *or ables, the discount *or 8uic! payments has become very hard8uic! payments has become very hard which has led to
which has led to the 2++.+/ increase in accounts payable betweenthe 2++.+/ increase in accounts payable between 200 and 2001.
200 and 2001. )he decrease in c
)he decrease in cash is also attributed to using it to *und the higherash is also attributed to using it to *und the higher amounts o* inventory
amounts o* inventory. . 6n 200$, the 6n 200$, the inventorinventory turnover y turnover ratio was $.$+ratio was $.$+ and there was a r
and there was a reduction in the ratio in 20eduction in the ratio in 2001 to .0. 01 to .0. )his shows that)his shows that Jones Electrical has over
Jones Electrical has overestimated their sales *or the estimated their sales *or the *uture and this*uture and this has led to a shortage in cash due
has led to a shortage in cash due to unnecessary purchase o*to unnecessary purchase o* inventory.
inventory. )he retur
)he return on assets *or Jones Electrical in 20n on assets *or Jones Electrical in 200 was 2.+/, .+/ i0 was 2.+/, .+/ inn 200$ and +./ in 200
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 ?ear 200 200 $ 200 1 @3 200 5ssumpti on 200 ;o trade discount< 200 ;with trade discount< &ales 312 373 1 22 2 10 200 200
Aost o* goods sold
3+0 3$+ $ 33 77 / o* sales 2370 23$ Bross Croft on sales +20 +3 2 307 $30 $$$ Operating expenses 22 +0 + 7 / o* sales 3 3 6nterest expense 2 +0 +3 / o* sales +$ +$
et 6ncome be*ore
taxes 23 1 $ 302
Crovision *or
income taxes 3$ 31 2 +/ tax 37 +$
5ppendix ' Balance Sheet ?ear 200 200$ 2001 @3 200 5ssumption 200 ;no trade discount< 200 ;with trade discount< Aash $ $+ 2+ +2 +2 +2 5ccounts :eceivable 3 2+3 21 270 / o* sales +3.01 +3.01 6nventory 2+ 2 +7 +2 / o* sales + +0 )otal current assets $ $12 111 $$ .01 0.01 Croperty and e8uipment 3 202 2$2 2$2 / o* sales +02. +02. 5ccumulated depreciation 77 3+ 32 3 3 )otal CC(E, net 33+ 30+ 33 330 32. 32. Total Assets $ 11$ 1$ 731.1 70.1 5ccounts payable +1 2 320 20+ 30 $ ine o* credit payable 37 23 27 2$0 +30 +7$ 5ccrued Expenses 3+ 3 3 32 constant 3 3 ong term debt, current portion 2 2 2 2 constant 2 2 Aurrent liabiliites 222 27 0 7 $2 73 ongterm debt 32 3$ 3+ 32 330 330 )otal iabilities 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.
=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<.
