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Jones Electric Distribution Essay

1518 words - 7 pages

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 ...view middle of the document...

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 would be, $199,000 less $117,000 giving you a total of $82,000. When acquiring about a $350,000 loan being able to reduce that price by $82,000 is quite significant. After accepting a large loan of $350,000, the president of Jones Electrical Distribution, is going to have to make cut backs and changes in everyday life.
One area that we feel that you could improve in is your purchasing of inventory. There seems to be a huge influx of additions to your inventory, and based on the decrease in your inventory turnover ratio, the increase of inventory seems to be a bit unnecessary. Looking at the financial statements we feel that you could improve your cash flows by buying the appropriate amount of inventory. Although you are expected to continually grow, we feel that if you purchased inventory in proportion to the growth that your company expects, it would improve your inventory turnover rate. Doing this would help you...

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