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Jones Electrical Case

In: Business and Management

Submitted By carrd1
Words 804
Pages 4
Devin Carr
Cases in Finance
9/13/11

Jones Electrical Distribution

In the case of Jones Electrical, after running pro-forma financial statements for the year 2007, Mr. Jones should forgo taking the trade discounts. Although it would seem advantageous to pay suppliers within the discount period (2/10/net 30), the amount of capital required is beyond the capability of the business and the extent that Southern Bank & Trust was willing to provide. As it can be seen from Exhibit 1, the amount of external finance needed to take the discounts equates to $389,000; Southern Bank & Trust was only will to extend of line of credit to the amount of $350,000. After forecasting the remaining three periods of 2007 it seems that Jones Electrical will be more profitable than the prior year. However, after further analysis of the company it becomes apparent there are several issues facing Mr. Jones. First, is the issue of incredible narrow margins. By the nature of the business, Jones Electrical is in the position of the middleman – providing a general store for contractors and electricians. Due to the circumstances, in the competitive market that exists Mr. Jones must utilize low prices to gain market share. Therefore, even though sales grow by 20.4% in 2007 his net margin is 1.35%, up only 0.01% from 2006 (as seen in Exhibit 2). The concern becomes, where is the money going if it is not trickling through the Income Statement from sales to net income?

The answer lies in the average days to collect and average days to pay ratios located on Exhibit 2. From the financial statements provided to date, it can be seen that during the years of 2004-2005 Mr. Jones was adamant about paying his suppliers within the discount period. However, during this period Mr. Jones appeared to be lenient with his customers on how quickly they paid their invoices. His average

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