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Jones Electrical Distribution

------------------------------------------------Jones Electrical Distribution In the past several years, Jones Electrical Distribution is profitable, but it is in the condition of cash shortage. With its 2007s sales go up, Jones need borrow more money to help its rapid development. Then he got a maximum line of credit $350,000. With our analysis report, we help Jones to choose whether to take advantage of 2% trade discount, we can observe that Jonescredit line will be $318,000 without discount, not $387,000 with this 2% discount. Problems Statement Jones Electrical Distributions current condition is not only cash shortage but also under rapid sales grows effect. Why this profitable firm needs to increase its borrowing, what kinds of strategies Jones Electrical Distribution will choose, and what his estimate of the loan needs is. These are the problems we will talk about bellows. Data Analysis 1. According to the balance sheet and sources and uses statements (appendix 1), we can see that the line of credit payable increases every year, because Jones needs more and more funds to support the needs of working capital and invest to long-lived assets such as plant, property and equipment to support higher sales levels. We can see that Jones used its profits (changed in Net Worth), cash and short-term debt to support the needs of working capital and the increase of inventory (probably to support higher sales levels). The reduction in long-term debt is a use of funds because Jones is repaying a loan. The decrease of cash is a source of funds to support a higher amount of inventory and prepare to repay the loan. The increase of total net property, equipment and accumulated depreciation is a use, which means Jones used its sources to invest more on plant, property and equipment.

2. Jones Electrical Distribution faces a rapid sales growth but meets the over inventory accumulated. Its Inventory turnover ratio in 2006 is down by 4.80 from 5.53 in 2005(see appendix 3 for data). It shows that less liquidity in inventory transitions. Previous failure sales prediction is one important reason which cause its cash shortage, less inventory transitions and extremely increasing in payable outstanding. This is also why this profitable firm needs to increases its borrowing. It needs this borrowing to adjust his rapid developing. 4. According to the pro forma statement (appendix 2) and ratio analysis, they are usually taking advantage of the trade discounts that makes them face a shortage of cash. They also have a huge amount of money invest in inventory, however, the collect of their accounts receivable is much later (43 days) than the pay of their accounts payable (10 days when 2% discount is taken). So this profitable firm needs to increase its borrowing. 5. From the data analysis we can see that the working capital turnover without take discount is higher than the working capital turnover with 2% discount taken, that means Jones is generating a lot of sales compared to the money it uses to fund the sales. In 2007, Southern Bank & Trust, will issue him a maximum amount of $350,000. If Jones does take the 2% discount offered by suppliers, it will dramatically increasing its accounts payable and draw the credit line to $387,000. However, if Jones does NOT take the 2% discount, the line of credit payable will maintain in $318,000, which is lower than $350,000. Besides, Southern Banks & Trust can issue a loan of $350,000 which is ideal for his business, Jones should forgo this 2% trade discounts and develop a long-term debt relationship with Southern Bank & Trust. 6. In order to succeed, Jones must keep their costs down and try to increase their sales, reduce their inventory. They also have to collect their account receivable more efficiency. Recommendation According to the pro forma statements (appendix 2), Jones should take the strategy that is rapid sales growth -- forgo trade discounts -- large need for financing -- debt finance -- long-term debt. According to the pro forma statement (appendix 2) and the strategy Jones take, it needs about $318,000 of loans.

Appendix 1: Source and Use Statement | Cash | | 2005 | 2006 | Change | Source/Use | | $53 | $23 | 30 | Source |

Accounts receivable | $231 | $264 | 33 | Use | Inventory | | $278 | $379 | 101 | Use | ||

Total current assets | $562 | $666 | | | | | | |

Property & equipment | $202 | $252 |

| | |

Accumulated depreciation | ($99) | ($134) | Total PP&E, net | $103 | $118 | 15 | Use | | | | | | | | |

Total assets | $665 | $784 | | | | | | |

Accounts payable | $42 | $120 | 78 | Source | Line of credit payable | $214 | $249 | 35 | Source | Accrued expenses | $14 | $14 | | | | |

Long term debt, current portion | $24 | $24 | Current liabilities | $294 | $407 | | | | | | | | |

Long-term debt | $158 | $134 | 24 | Use | Total liabilities | $452 | $541 | | | | | | | | |

Net worth |

| $213 | $243 | 30 | Source | | |

Total liabilities and net worth | $665 | $784 |

Source and Use Statement Sources | Cash | 30 | Accounts Payable | 78 | Line of credit payable | 35 | Net worth | 30 | Total sources | 173 | Appendix 2: Pro forma statement Income Statement | (thousands of dollars) | | | | | Pro Forma | Pro Forma(with discount rate) | | 2004 | 2005 | 2006 | 2007 | | Uses | |

Accounts receivable | 33 | Inventory | 101 | Total PP&E, net | 15 | Long-term debt | 24 | Total uses | 173 |

Net sales | $1,624 | $1,916 | $2,242 | $2,700 | $2,700 | COGS GrsPOS |||||| Oper. exp.| $272 | $307 | $347 | Int. Exp NIBT ||||||
Provision for income taxes

| $1,304 | $1,535 | $1,818 | $2,190 | $2,146 | | $320 | $381 | $424 | $510 | $554 |

$419 |

$419 |

| $27 | | $21 |

$30 | $44

$31 | | $46

$37 | $37 | | $55 | $99 |

| $7 | $15 | $29

| $16 | $30

| $19 | $19 | | $36 | $79 |

Net income | $14

Balance Sheet | | | | | | (thousands of dollars) | | | | | |

| | | | Pro Forma | Pro Forma(with discount rate) | | 2004 Cash A/R Inv. TCA PPE Ac/Dep | $45 | $187 | $243 | 2005 | $53 | $231 | $278 | 2006 | $23 | $264 | $379 | $666 | $252 | ($134) | $118 | as December 31, 2007 | | $32 | $32 | | $318 | $318 | | $456 | $447 | | $806 | $797 | | $292 | $292 | | ($174) | ($174) | | $118 | $118 |

| $475 | $562 | $187 | $202

| ($74) | ($99)

Total PP&E, net | $113 | $103 |||||| Total assets | $588 | $665 | 2004 Accounts payable | $36 | 2005 | $42

| $784 | 2006 | $120

| $924 | $915 | | as December 31, 2007 | | $180 | $58 | | $318 | $387 |

Line of credit payable | $149 | $214 | $249

Accrued expenses | $13 | $14 | $14 | $14 | $14 | Long term debt, current portion | $24 | $24 | $24 | $24 | $24 | Current liabiliities | $222 | $294 | $407 | $536 | $483 | Long-term debt | $182 | $158 | $134 | $110 | $110 | Total liabilities | $404 | $452 | $541 | $646 | $593 | |||||| Net worth | $184 | $213 | $243 | $279 | $322 | Total liabilities and net worth | $588 | $665 | $784 | $924 | $915 |

Appendix 3: Data analysis | | | | | With 2% discount | | 2004 | 2005 | 2006 | 2007 | 2007 | ROA | 2.34% | 4.32% | 3.83% | 3.84% | 8.66% | ROE | 7.46% | 13.49% | 12.35% | 12.75% | 24.62% | Inventory Turnover | 5.37 | 5.53 | 4.80 | 4.80 | 4.80 | Current Ratio | 2.14 | 1.91 | 1.64 | 1.50 | 1.65 | Quick Ratio | 1.05 | 0.97 | 0.71 | 0.65 | 0.72 | Working Capital Turnover | 6.42 | 7.16 | 8.67 | 9.99 | 8.60 |

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