Jones Electrical Distribution: Presented By: Ben Nalty, Nick Weyrens, Chris Mlincsek, Besian Nushi

Jones Electrical Distribution
Mr. Jones,
A recent evaluation of Jones Electrical Distribution has occurred in request of a
loan. An assessment of the companys 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 develop, grow,
and add additional sites in the future. Internal and external references about Jones
engineering have been beneficial in consideration for a loan.
II. Problem Statement
Recently the continued growth in sales has raised accounts receivable and
inventories considerably. This decrease in inventory turnover has caused accounts
payable to rise due to heavy reliance on credit from suppliers. There are many ways in
which you can lower the size of the line of credit needed. Good management can lower
the credit line needed by lowering the inventories and accounts receivables, which grew
in 2005 and 2006 because Jones is trying to increase production and growth by pushing
the products to the customers. In 2003 Nelson Jones was involved in an argument with
his partner Dave Verden and Jones agreed to buy out his partner for $250,000, paying him
$2,000 a month with an 8% per year interest rate. It will take Jones 10.83 years to pay
back his old partner. Having that extra expense will decrease his monthly income
requiring him to retain a higher loan amount. Since the market for Jones Electrical
Presented by: Ben Nalty, Nick Weyrens, Chris Mlincsek, Besian Nushi
Page 1

Distribution is fragmented, Jones is trying to increase its inventory. Inventory turnover
ratio for 2005 is (1535/278=5.52) 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 days
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
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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 be more profitable.
Another area of concern for us is your collections policy. We feel that if you
enforced a more strict collections policy that it would improve other areas of your
finances. By the looks of it, it appears that the lack of enforcement has deducted your
available cash which has forced an inhibition of payment during the discount period on
your credit line. We feel that you need to take the necessary steps to collect on your
Accounts Receivables in a timely manner, so that you may take advantage of the discount
period. According to our calculations you are forgoing approximately $67,000 by
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capitalizing on the discount period. Although this would not completely remedy your
need for additional finances, we feel that it would reduce it significantly.
After speaking to associate Jim Lyons who is an established customer at Southern
Bank and Trusts he ensured that Jones was managed by a man that lived a modest
lifestyle and is considered a hands-on manager of great innovation in the electrical field.
We also spoke to some of the manufacturers in which Jones purchases products from; the
administrators at such manufacturers explained to us that exceptional at expense
management has always been a top priority for you and your company. This leads us to
believe that you are an outstanding candidate for our loan and that we would be grateful
to accept your business.
2004
2005
2006
Quick Ratio
(475-243)/222=
1.05
(562-278)/294=
0.97
(666-379)/407=
0.64
Inventory Turnover
1624/243=
1916/278=
2242/379=
6.68
6.89
5.92
Days Sales Outstanding
187/(1624/365)=
42.03
231/(1916/365)=
44.01
264/(2242/365)=
42.98
Days Payable Outstanding
36/(1304/365)=
42/(1535/365)=
120/(1818/365)=
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10.08
Fix Asset Turnover
1624/113=
9.99
1916/103=
14.37
Return on Asset
NI/Avg. TA=
2242/118=
18.6
NI/Avg. TA=
NI/SE=
Formula for the

Conversion Cycle:
CCC=(InvAP/COGS/365)+
(AR/Sales/365)
4.4
NI/SE=
7.6
19
NI/Avg. TA=
2.4
Return on Equity
24.09
3.8
NI/SE=
13.6
12.3
Cash
Appendixes: A
II. Income Statement (As % of

Sales)
Page 5

Net Sales
CoGS
2004
100
80.3
2005
100
80.11
2006
100
81.09
Gross Profit
19.7
19.89
18.91
16.75
1.66
1.29
16.02
1.57
2.3
15.48
1.58
2.05
0.43
0.86
0.78
1.51
0.71
1.34
2004
7.65
31.8
41.33
80.78
31.8
12.59
19.22
2005
7.97
34.74
41.8
84.51
30.38
14.89
15.49
2006
2.93
33.67
48.34
84.93
32.14
17.09
15.05
100
100
100
Accounts Payable
Line of Credit Pay
Accrued Expenses
Long Term Debt
Current Liabilities
6.12
25.34
2.21
4.08
37.76
6.32
32.18
2.11
3.61
44.21
15.31
31.76
1.79
3.06
51.91
Long Term Debt

Total Liabilites
30.95
68.71
23.76
67.97
17.09
69.01
Net Worth
Total Liabilities & Net Worth
31.79
100
32.03
100
30.99
100
Operating Expenses
Interest Expenses
Net Income
Provision for Income Taxes
Net Income
Balance Sheet (As % of Sales)
Cash
Account Receivables
Inventory
Total Current Assets
Property & Equipment
Acc. Depr.
Total PPE, net
Total Assets
Appendixes: B
III. Statement of Cash Flows
Page 6

2005
2006
29
30
Cash Flow From Operations

Net Income
Additions to Cash
Depreciation
Increase in Accounts
Receivable
Increase in Accounts Payable
Accrued expenses
99
134
231
42
14
264
120
14
Subtractions From Cash

Increase in Inventory
Net Cash from Operations
278
53
279
23
Cash Flow From Investing

Equipment
202
252
Cash Flow From Financing

Line of Credit Payable
214
249
Net Cash Flow
268
75
324040734.doc
Appendixes: C
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