Jones Electrical Distribution
In the case of Jones Electrical, after running pro-forma financial statements for the year 2007, Mr. Jones should forgo taking the trade discounts. Although it would seem advantageous to pay suppliers within the discount period (2/10/net 30), the amount of capital required is beyond the capability of the business and the extent that Southern Bank & Trust was willing to provide. As it can be seen from Exhibit 1, the amount of external finance needed to take the discounts equates to $389,000; Southern Bank & Trust was only will to extend of line of credit to the amount of $350,000.
After forecasting the remaining three periods of 2007 it seems that Jones Electrical will be more profitable than the prior year. However, after further analysis of the company it becomes apparent there are several issues facing Mr. Jones. First, is the issue of incredible narrow margins. By the nature of the business, Jones ...view middle of the document...
Jones was adamant about paying his suppliers within the discount period. However, during this period Mr. Jones appeared to be lenient with his customers on how quickly they paid their invoices. His average days to collect for the years 04’-06’ were 43. This had a two-fold effect. First, it shorted the...
1. How well is Jones Electrical Distribution performing? What must Jones do well to succeed?
Jones Electrical is performing well. The company is not a smaller company that had a net income of around $30,000 with net sales of around $2.4 million. Although the company is not to large they have continued to have growth year after year.
Recent forecasts show sales might begin to slow down. The success of the company will depend on doing what the company is doing currently since they have continued to grow. Selling electrical devices is an extremely competitive market. The company has been able to build up high sales volume through cheaper pricing than its competitors and through a strong sales force. The company has also been able to keep prices down by maintaining a strict budget with tight control over operating expenses, including paying its sales team on commission and keeping overhead low.
Financing is another key in a business and is a large factor that will determine the success of Jones Electrical is their financing. Jones Electrical needs to take out larger loans in order to build up inventory and increase sales. Also by taking loans the company is able to take advantage of the 2% purchase discounts that its manufacturers provide. The company’s financials show that with an increase in its line of credit the more sales it has, resulting in growth and a higher net income.
2. Why does a business that has a profit of $30,000 per year need a bank loan?
A loan in many cases for companies is something that is necessary to have a successful growth and create excellent opportunities. The company’s biggest problem is its shortage of cash. With the extra cash Jones Electrical will be able to buy more inventories which will help it to grow and increase sells. The cash will also allow Jones Electrical to take advantage of the 2% purchase discount.