Running Head: JONES CASE ANALYSIS
Finance Case Study:
Jones Electrical Distribution
Adam Brown, Edwin Aguilar, and Todd Cary
Professor J. McHugh
BUSN 370-03
10 December 2015
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Running Head: JONES CASE ANALYSIS
Executive Summary
Nelson Jones, the sole owner of Jones Electrical Distribution, is facing tough decisions
about how to improve his company. Jones has the option to pursue rapid sales growth, or
minimal sales growth with subsequent implications. If Jones pursues rapid sales growth, he
must decide whether to forego or accept trade discounts, and whether debt or equity would be
adequate for financing. On the other hand, if Jones decides to pursue minimal sales growth, he
will have the option to forego or accept the discount, and whether or not to accept any form of
financing. If Jones opts for debt financing, he must choose whether to continue relations with a
new bank, Southern Bank & Trust, or through long-term debt.
Situation Analysis
For the past few years Jones Electrical has increased its sales consistently. In fact, they were
performing well enough that they began increasing their inventory as a part of an aggressive
inventory forecasting strategy. However, due to poor cash management, their cash on hand has
suffered significantly in the process. This cash shortage has forced Jones Electrical to dip into a
line of credit to conduct their operations. Their credit limit is approaching, and Jones has the
option to extend a line of credit by $100,000 with a new bank, or consider other financing
options. Based on an analysis of the company’s financial statements, business environment,
and related assumptions, we will provide a recommendation for how Jones Electric can improve
its financial situation in the years to come.
Case Analysis Questions
1. How well is Jones Electrical performing?
Overall, Jones Electrical is performing moderately well due to consistent growth and
increasing sales. However, the business is still struggling with cash flow due to ineffective
inventory management and collecting payments from customers as of late. We can see the
growth of Jones Electrical through increases in Net Income. However, the cash flow needs to be
more consistent with the amount of money received and the amount of money being
distributed to inventory, projects, and paying back debt financing. Nelson Jones should have a
positive outlook on the position his company is in, but will require more financing if he expects
to grow his business.
2. What must Jones Electrical do well to succeed?
There are three main needs for Jones Electrical to accomplish in order for them to be a
successful, competitive company in their market environment.
a. Jones Electric needs to better manage their inventory and inventory forecasting. Jones
Electric has too much inventory on hand resulting from a higher demand in previous
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Running Head: JONES CASE ANALYSIS
years. However, since they have not forecasted correctly, the additional inventory has
inhibited cash flow significantly.
Account Change per Yr ($)
Net Income
Inventory
2005
$15,000.00
$35,000.00
2006
$1,000.00
$101,000.00
2007
$9,641.60
$76,937.53
b. Jones Electric needs to forego the trade discount. In theory, the 2% discount should
always be taken because Jones Electrical would be saving money. However, if you take
into consideration the cash flow statement and the money that should be kept on hand
to pay off loans, Jones Electrical should not pay the 2% discount rate. Taking discount
dramatically alters how much funding the company needs. By constantly monitoring
these numbers, they can change their payment methods to fit the most profitable and
efficient scenario. Long Term Debt plays a major role in this decision.
Line of Credit Payable with
and without discount
$424,381.35
$346,411.26
c. Jones Electric needs to improve collection from customers. Accounts Receivable has
increased considerably from 2005 to 2007, and their inability to collect has inhibited
their cash flow. Jones has a good sales model, and strong customer relations, yet he will
need to request customers to pay sooner.
Turnover Ratios (days)
Accounts Receivable
Accounts Payable
2005
44.01
9.99
2006
42.98
24.09
2007 Average
43.00
43.33
10.00
14.69
3. Why does a business that has net income of $30,000 per year in 2006 need a major bank
loan?
Net Income does not always represent the financial needs of a company. Jones Electrical
has an increasing amount of Gross Profit, but they also have an increasing amount of Inventory
and Accounts Receivable. Jones Electrical is not receiving the money of the supplies that they
are selling. Jones Electrical has a Gross Profit percentage increase of 17%, but they also have a
12% increase in Accounts Receivable and a 36% increase in Inventory.
Considering these circumstances, it is no surprise that Jones Electrical is considering
more financing because they are not matching the products and materials bought from
suppliers to the products and materials they are selling. The 36% increase in Inventory and the
12% increase of Accounts Receivable far outweigh the percentage shift of Gross Profit. The
financing may allow Jones Electrical to continue purchasing supplies although there may be a
decline of sales in the marketplace or there may be an increase of a purchase on credit.
Running Head: JONES CASE ANALYSIS
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4. What drove the increase in Jones’s accounts receivable and inventory balances in 2005 and
2006?
From 2004 to 2006, there was a rapid increase of demand for Jones Electrical products.
This requires an increase in supply in order to keep up with the competitive market. The
increase of supply/inventory was the right decision, but it affected the time that it takes the
company to receive payment. This brings a negative impact on the cash flow of the company.
Another reason that Jones’s accounts receivable and inventory balances increased in 2005 and
2006 has to do with the commission basis sales force. Employees paid on commission will offer
products that must be bought from a supplier because they are out of stock. This can drive up
the inventory of certain products. If an employee is making money from commission, they are
also more likely to change the payment periods allowed in order to close a sale. This affects the
accounts receivable drastically.
5. Is Nelson Jones’s estimate that a $350,000 line of credit sufficient for 2007 accurate?
Answer by using the excel spreadsheet and assumptions provided to forecast Jones Income
Statement and Balance Sheet in 2007.
The estimated $350,000 line of credit could or could not be sufficient depending on the
payment approach of Jones Electrical. If Nelson Jones decides to pay his suppliers the 2%
discount allotted to him within 10 days, the line of credit will be about $75,000 short. On the
other hand, Nelson Jones could take the full amount of time to pay back his suppliers and
would only need $346,411 of the total amount of the line of credit. In taking the 2% discount,
the line of credit would be insufficient, but by not taking the 2% discount the line of credit
would be sufficient (Appendix B).
6. What needs to change to reduce the borrowing needs for the Jones company?
Jones needs to increase in their cash flows. In 2006 alone, more than 50% of their cash
flow dropped, forcing them to consider increasing their borrowing limit. Jones’ line of credit
needs to decline if he is to avoid bankruptcy. A cause of their thirst for cash is their inability to
sell off their inventory. Still, he must be careful to not decrease the inventory too much, for this
could slow up growth and net sales. Jones should not take the discount, for they need cash
more. They are increasing each year, causing them to lose cash and build more assets.
7. Do you think Jones should pay his suppliers early to obtain the 2% discount or pay his
suppliers in 30 days and forego the 2% discount?
Jones Electrical should forego the 2% discount and opt to pay his suppliers back in 30
days. Taking the 2% discount may alter the Net Income more positively for 2007 (Appendix A),
but it will not help his cash flow situation. Jones Electrical has paid back its suppliers with an
average close to 10 days, with the exception of 2006, but has consistently failed to receive
payments on Accounts Receivable until 40 days out or more on average. The money saved from
the discount does not outweigh the benefit of having a balance between Accounts Payable and
Running Head: JONES CASE ANALYSIS
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Accounts Receivable Turnover ratios. Delaying to pay suppliers will help Jones Electrical manage
its cash flow more efficiently.
8. Would you as Ms. Montrose agree to lend Jones the money?
I would only agree to lend Jones the money if he opted to forego the trade discount of
2%. If Jones Electric decided to take the trade discount, their cash flows would be much more
restricted, thus hindering their ability to pay back the loan. The forecasted Balance Sheets
illustrate the clear difference between the two options in terms of how much of the loan would
be required. With the discount, Jones Electrical would need a line of credit over $400,000 which
exceeds the amount of the loan offered. However, if Jones Electric rejects the discount, their
line of credit payable would decrease to just under 350,000. Still, Jones must consider whether
taking any further line of credit at all would really improve his business.
9. Jones has been thinking about investing $200,000 in an inventory management software
system. His sales rep has guaranteed free cash flows of $60,000 per year for 5 years as a
return on the investment. The $60,000 would be a combination of reduced inventory carrying
costs, admin charges from his freight carriers and the reduction of one person in his customer
service department. Calculate the NPV assuming a 10% discount rate and the IRR. Does the
$200,000 software system seem like a good investment?
According to NPV calculations, this would be a good investment to decrease the high
levels of inventory, and yield profit. This project would have an NPV of $27,447.21, and an IRR
of 15.24%.
10. What would you do as Mr. Jones? Come up with your top 3 options and then pick one as
your final and best recommendation to ensure his company is successful into the foreseeable
future.
1. Jones Electrical could opt for the line of credit for the full $350,000. However, the
discount would not be feasible considering this option as illustrated in the projected
Balance Sheets for 2007. This option would be very risky for Jones Electrical if he could
not keep enough cash on hand to pay the interest expenses on the loan. Additionally,
the bank would probably require some sort of collateral, which could cause Jones to
lose a considerable portion of his company should he default on the loans .
2. Jones Electrical could renounce any form of investment from the bank, forego the trade
discounts, and address his current issues with cash flow. This is not the most feasible
option if Jones is expecting to grow rapidly. Jones may be able to address some issues
with collections, inventory, and cash flows on his own, but without much ambition to
expand.
3. Jones Electrical could refuse a line of credit from the bank, and choose to raise financing
through receiving equity investments.
Running Head: JONES CASE ANALYSIS
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Our Recommendation
Jones Electrical could refuse a line of credit from the bank, and choose to raise
financing through receiving equity investments. This is the most feasible option because it
allows Jones to raise capital without paying interest, therefore providing an opportunity to
address his cash flows. Investors would be concerned about current Cash Flow issues, an area in
which Jones is weak. However, Jones would be able to invest the money into a new inventory
management software system, which would yield a positive Net Present Value, and improve
Inventory management into the future. Jones has a good credit rating and is trustworthy with
his personal finances according to Lyons, and this is the character that would attract angel
investors. Additionally, Jones could use advising as he continues to grow his business, a key
benefit of equity investors.
Faith and Integration
Contentment is not only the key to a thriving Christian life, but also incredibly helpful in
making financial decisions. Jones has many different options before him, but he must
remember to be content with how much progress he has already made. This will help him to be
patient, and thoughtful in making the best decision rather than hasty, greedily, or with prideful
disposition. Indeed, Paul reminds us that, “if we have food and clothing, with these we will be
content. But those who desire to be rich fall into temptation, into a snare, into many senseless
and harmful desires that plunge people into ruin and destruction” (1 Tim 6:8-9, emphasis
mine). If Jones does not first consider what he has already accomplished, and how much he
already possesses, he could easily stray into tempting thoughts that would cause him to pursue
wealth aggressively and hastily. In this decision, Jones needs to make a patient and thoughtful
position that will improve his overall financial position, and cannot be distracted by mere shortterm gains.
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Running Head: JONES CASE ANALYSIS
Appendices
Appendix A: Projected 2007 Income Statement with and without trade discount
Income Statement
Net Sales
COGS
Gross Profit on Sales
Operating Expenses
Interest Expense
Net Income Before Taxes
Provision for Income Taxes
Net Income
2007A
2007B
$2,700,000.00
$2,189,700.00
$2,700,000.00
$2,243,700.00
$510,300.00
$418,500.00
$31,000.00
$456,300.00
$418,500.00
$31,000.00
$60,800.00
$21,158.40
$6,800.00
$2,366.40
$39,641.60
$4,433.60
Appendix B: Projected 2007 Balance Sheet with and without trade discount
Balance Sheet
2006
2007 A
2007 B
Cash
A/R
Inventory
Total Current Assets
$23,000.00
$264,000.00
$378,612.00
$665,750.00
$23,000.00
$318,082.19
$455,937.53
$797,019.73
$23,000.00
$318,082.19
$467,181.37
$808,263.56
PPE
A/D
Total PPE, net
$252,000.00
$252,000.00
$252,000.00
$(134,000.00)
$(134,000.00)
$(134,000.00)
$118,000.00
$118,000.00
$118,000.00
Total Assets
$783,750.00
$915,019.73
$926,263.56
A/P
Line of Credit Payable
Accrued Expenses
LT Debt, Current Portion
Total Current Liabilities
LT Debt
Total Liabilities
$119,562.00
$249,183.00
$59,991.78
$424,381.35
$184,413.70
$346,411.26
$14,333.00
$24,000.00
$407,078.00
$14,333.00
$24,000.00
$522,706.13
$14,333.00
$24,000.00
$569,157.96
$134,000.00
$541,078.00
$110,000.00
$632,706.13
$110,000.00
$679,157.96
Net Worth
$242,672.00
$282,313.60
$247,105.60
Total Liabilities and Net
$783,750.00
$915,019.73
$926,263.56
Running Head: JONES CASE ANALYSIS
Worth
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