Jones Electrical Distribution

Part I: Describe the Situation

Jones Electrical Distribution is a rapidly growing company expecting further rise in sales in the
future. However, a low cash flow was causing the company to increase its borrowing from the
local Metropolitan Bank. The past year, Jones Electrical Distribution had to borrow $250,000
from the bank, which is the maximum loan that Metropolitan will allow to any one borrower.
Therefore, Nelson Jones, owner and president of JED, was looking for a bank to grant larger
loans. A friend of Jones did business with Southern Bank & Trust, which offered up to a
maximum loan amount of $350,000. Jones felt this amount was more than enough and was
hopeful SB&T would agree to a business relationship. The credit department of Southern Bank
& Trust is currently investigating JED to determine if they should conduct business with one
another.
Part II: State the problem
Nelson Jones, sole owner of Jones Electrical Distribution, has recently been faced with the
situation where an increase in his loan amount is imperative. Jones currently has a relationship
with Metropolitan Bank where he received a loan of $250,000, the maximum amount the bank
will make. The end of year statements between 2005 and 2006 showed a sizeable decrease in
cash, as well as a hasty increase in Accounts Payable and Line of Credit, both considerable
grounds for an increase in loan amount. The issue at hand arises due to the fact that Metropolitan
Bank is either unwilling or unable to extend a larger amount.
A friend of Jones referred him to Southern Bank & Trust where Jones was introduced to
relationship officer Rachel Montrose. Favorable comments made by manufacturers from whom
Jones buys his equipment and his promising history of paying invoices in a timely manor, among
otherwise financial decisions, proved Jones was a contender for a loan, and subsequently agreed
upon $350,000.
Even with the sizable loan of $350,000, Jones must reevaluate the way in which he handles
financial decisions in order to ensure continual growth of his company. Specifically, he needs to
focus on whether or not to take the 2% trade discounts by paying the invoices within ten days of
the purchase and where the financing will come from.
Part 3
Income Statement as a Percentage of Sales
| 2004 | 2005 | 2006 |
Net Sales | 100.00% | 100.00% | 100.00% |
COGS | 80.30% | 80.11% | 81.09% |

Gross Profit on Sales | 19.70% | 19.89% | 18.91% |

Operating Expense | 16.75% | 16.02% | 15.48% |
Interest Expense | 1.66% | 1.57% | 1.38% |
Net Income Before Taxes | 1.29% | 2.30% | 2.05% |
Provision for Income Taxes | 0.43% | 0.78% | 0.71% |
Net Income | 0.86% | 1.51% | 1.34% |
Balance Sheet as a Percentage of Total Assets
| 2004 | 2005 | 2006 |
Cash | 7.65% | 7.97% | 2.93% |
Accounts Receivable | 31.80% | 34.74% | 33.67% |
Inventory | 41.33% | 41.80% | 48.34% |
Total Current Assets | 80.78% | 84.51% | 84.95% |
Property & Equipment | 31.80% | 30.38% | 32.14% |
Accumulated Depreciation | 12.59% | 14.89% | 17.09% |
Total PP%E, net | 19.22% | 15.49% | 15.05% |
Total Assets | 100.00% | 100.00% | 100.00% |
Accounts Payable | 6.12% | 6.32% | 15.31% |
Line of Credit Payable | 25.34% | 32.18% | 31.76% |
Accrued Expenses | 2.21% | 2.11% | 1.79% |
Long-term Debt, Current Portion | 4.08% | 3.61% | 3.06% |
Current Liabilities | 37.76% | 44.21% | 51.91% |
Long-term Debt | 30.95% | 23.76% | 17.09% |
Total Liabilities | 68.71% | 67.97% | 69.01% |

Net Worth | 31.29% | 32.03% | 30.99% |

Total Liabilities and Net Worth | 100.00% | 100.00% | 100.00% |
Financial Ratios
Quick Ratio = (Current Assets Inventory)/Current Liabilities
2004:
= (475-243)/222
= 1.05
2005:
= (562-278)/294
= .97
2006:
= (666-379)/407
= .71
Inventory Turnover = Sales/Inventory
2004:
= 1624/243
= 6.68
2005:
= 1916/278
= 6.89
2006:
= 2242/379
= 5.92

Days Sales Outstanding = Accounts Receivable (end of year)/ (Sales/365)

2004:
= (187) / (1624/365)
= 42
2005:
= (231) / (1916/365)
= 44
2006:
= (264) / (2242/365)
= 43
Days Payable Outstanding = Accounts Payable (end of year) / (COGS/365)
2004:
= 36 / (1304/365)
= 10
2005:
= 42 / (1535/365)
= 10
2006:
= 120 / (1818/365)
= 24
Fixed Assets Turnover = Sales / Net Fixed Assets (end of year)
2004:
= 1624 / 113

= 14.37
2005:
= 1916 / 103
= 18.60
2006:
= 2242 / 118
= 19.00
Jones electrical is a small company that wholesales electrical equipment. They have had a
continuous profit for three years but are facing a shortage in cash, when taking advantage of
trade discounts. Lets take a look at some of their financial ratios and percentages. Joness net
income doubles from 2004 to 2005 then slightly decreases from 1.51% to 1.34%. Their total
current assets stay almost constant in the 80% range of their total assets. Their main problem is
their shortage in cash. As you can see, it decreases from 7.97% in 2005 to a staggering 2.93% of
total sales in 2006. This is due to their increases in Accounts payable from 2005 to 2006. They
are not taking advantage of discounts and this is critical when your accounts payable more than
double. A good sign for their loan is that their long-term debt and expenses have decreased over
the years, showing they can pay off debt. Joness definitely needs to improve on their days sales
outstanding. When having a shortage of cash, a low DSO is needed. Jones needs to improve their
DSO that has been in the 40s and bring it somewhere down into the 20s. They can achieve this
by offering better discounts than their competitors for paying within ten days of a purchase. This
would decrease the need of a larger line of credit.
Jones bank will not extend their credit past $250,000. They try to fix this by acquiring financing
from a larger regional bank. Jones could tighten its cash collections or try and acquire the
$350,000 from the larger bank. Their ineffective collections policy has caused them to be short
on cash and seek this financing. They could reduce the amount of their line of credit if they paid
out their 2007 first quarter accounts payable within the ten-day period. By doing this, they would
only save $4,060, but at this point, every bit of cash helps. Other than this, Jones has competitive
pricing, effective inventory management, and a good sales force.