Jones Electrical case study solution

 Jones Electrical Electrical Distribution Distribution Case – Introduction Over the past several years, Jones Electrical has become a very proftable electric electric component dealer. dealer. Despite these great results, results, they have discovered a cash shortage and with sales expecting to rise in 200, the frm needs to ta!e up more debt in order to support its development. Jones Electrical"s Electrical"s current current ban! is unable to increase increase 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 #+$0,000. Problem elson needs to choose whether he should switch *rom -etropolitan 'an! to &outhern 'an! ( )rust in order to extend his line o* credit. urthermor urthermore, e, he needs to consider whether or not to continue with the trade discount *rom the suppliers at 2/ or i* he should instead pay them a*ter the due date. Analysis  Jones Electrical has grown grown very steadily over over the years. &ales have grown every year and between 200 to 2001 they rose by +.3/ *rom #3,12,000 to #2,22,000. urthermore, sales are pro4ected to increase to #2,00,000 #2,00,000 *or 200. 200. 5lthough proft has been growing growing along with sales, the proft margin o* Jones Electrical is relativity small *or the amount o* revenue revenue it creates. creates. 6n 2001, the proft proft margin was at 3.+/ and in 200, the margin margin was as low as 0.7/. )his represents represents the frm"s proftability proftability is not very secure. secure. 5 single economic downturn downturn could possibility lead to a negative proft margin *or Jones Electrical. urthermore, the 3.2/ increase in accounts receivable between 200 and 2001 are some o* the reasons behind the decrease in cash, as *ewer clients want to pay cash *or the goods. 'ecause o* these receivables, receivables, the discount *or 8uic! payments has become very hard which has led to the 2++.+/ increase in accounts payable between 200 and 2001.  )he decrease in cash cash is also attributed to using it to *und the higher amounts o* inventory. inventory. 6n 200$, the inventory inventor y turnover ratio was $.$+ and there was a reduction reduction in the ratio in 2001 2001 to .0. )his shows that  Jones Electrical has overestimated overestimated their sales *or the *uture and this has led to a shortage in cash due to unnecessary purchase o* inventory.  )he return return on assets *or Jones Electrical in 200 200 was 2.+/, .+/ in in 200$ and +./ in 2001. 2001. )hese low values represent represent the proft proft per

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('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 200 

200 $

200 1

Aost o* goods sold

312  3+0 

373 1 3$+ $

22 2 33 

Bross Croft on sales

+20

+3

2

307

Operating expenses

22

+0

+

7

2

+0

+3



23



1



Crovision *or income taxes



3$

31

2

et income

3

27

+0

$

 ?ear

&ales

6nterest expense et 6ncome be*ore taxes

@3 200

5ssumpti on

10 77

/ o* sales

/ o* sales / o* sales

+/ tax

200 ;o trade discount<

200 ;with trade discount<

200

200

2370

23$

$30

$$$

3

3

+$

+$

$

302

37

+$

+

$

5ppendix ' Balance Sheet  ?ear

200

200$

2001

@3 200

Aash 5ccounts :eceivable 6nventory  )otal current assets

$ 3

$+ 2+3

2+ 21

+2 270

2+ $

2 $12

+7 111

+2 $$

Croperty and e8uipment 5ccumulated depreciation  )otal CC(E, net

3

202

2$2

2$2



77

3+

33+

30+

Total Assets

$

5ccounts payable ine o* credit payable 5ccrued Expenses ong term debt, current portion Aurrent liabiliites

5ssumption

200 ;no trade discount< +2 +3.01

200 ;with trade discount< +2 +3.01

/ o* sales

+ .01

+0 0.01

/ o* sales

+02.

+02.

32

3

3

33

330

32.

32.

11$



1$

731.1

70.1

+1

2

320

20+

30

$

37

23

27

2$0

+30

+7$

3+

3

3

32

constant

3

3

2

2

2

2

constant

2

2

222

27

0

7

$2

73

/ o* sales

ongterm debt  )otal iabilities

32

3$

3+

32

330

330

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.

idterm

=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