Jones Electrical Distribution Case Analysis Team 9
1. How well is “Jones Electrical Distribution” performing? What must Jones do well to succeed?
Johns Elactrical is constantly growing both in term of net sales
and gross profit : turnover has been increased 18% in 2005 and 17.4% in
2006, while gross profit is increased 19% in 2005 and 11% in 2006. An expected growth of
sales by 20% is forecasted in 2007.
Key strength of his business model is the strong relationship with his stakeholders, both customers and s
uppliers, that support the idea to continue to perform in the future.
The operating cash flow looks being the weak point of
Jones strategy: since 2004 account receivables (DSO) need 42 days averagely to be collected while 10 day
s is the lead time promised to pay supplier, as his business model was based on 2% discount. By 2006’s
figures we can confirm that the discount model was not sustainable as less discounts were applied since
the company was running out of cash (2006 vs 2004 51.1% cash reduction). Another factor
Jones must improve is the sales forecasting and inventory management. Despite the improving on invent
ory turnover (-13%), the year-end level is increasing by 36%.
In summary main operating aspects to be improved are the collections from customer and the inventory
management. Quick ratio index getting worse from 1.05 in 204 to 0.71 in
2006 confirms the assumptions.
2. Why does a business that has a profit of $30,000 per year need a bank loan?
A postitive Net Income by $30,000 doesn`t show the need of
a business loan for a company. Despite the satisfying Gross Profit generated by the company (Net incom
e = 30 K USD in 2006), the lack of
cash flow coming from the operating cycle generates the need of external sources of finance.
Jones Electrical Distribution increases their Gross Profit by 17% in
2006, but on the other side they also increased their inventroy by 36%
and their A/R by 12%. With this increasing A/R
and Inventory Jones is lacking Cash. If they want to grow futher more, they have to finance their dayily b
usiness.
3. What drove the increase in Jones’s accounts receivable & inventory balances in 2005 & 2006?
As shown in the sales,
Jones Electrical Distribution increases the deamnd of products purchased from 2004 to 2006. The increa
se in current assets is generated by both the business increase and the unfavorable payment term condi
tions agreed with customers. The high increase of inventory was right to capture this demand, but also e
ffectet the companies cash
as it takes a long time to receive cash for the inentory (A/R turnover 43 days in
2006). Summaries all these points, it has
a highly negative impact on Jones Electrical Distributions cash flow.
4. Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007 accurate?
The estimated
5. When will Jones be able to repay the line of credit?
Only in case Jones gives up to pay suppliers in 10 days (loosing the related 10% benefit)
6. What could Jones do to reduce the size of the line of credit he needs?
Jones Electrical Distribution need to increase its cash flow as 51.1% of their cash dropped in 2006 (2004
Cash $45 – 2006 Cash
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$23). This drop in their cashflow forces Jones to increase their debt. What causes their need for cash? Th
eir inability to sell off their inventory is one factor, why they are short in
cash. Although they can`t reduce their inventory too much as this could slow down Jones growth. On the
other hand, Jones needs to improve urgently its collection ability since it
´s negatevily affecting the cash flow availability.
Another feasible solution could be to receive equity financing from third parties. This way,
Jones will not only be able to increase its cash flow but also will avoid interest payments.
7. What are the implications for Jones’s lifestyle of accepting the new, large line of credit?
By increasing its finance options, Jones will be able to stay even more competitive considering its sales fo
recast for 2007 and the good relationship they have with the different stakeholders. However, Jones´s lia
bilities will increase putting more pressure on Nelson´s managment capabilities, especially on how to im
prove the collection days and optimize the level of inventory. It is important to consider that a
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