Jones Electrical Distribution

Mr. Jones, A recent evaluation of Jones Electrical Distribution has occurred in request of a loan. An assessment of the companys financial health shows that it is profitable. The shortage in cash flows regards managerial attention. Since Jones opened in 1999 the company has seen rapid growth in a highly competitive field. General contractors and electricians have preferred Jones for their business. The request for this loan also has occurred at the end of March; past patterns show that your company is seasonal, with most sales occurring in spring and summer months. Previously stated facts estimate that sales will gradually increase. If managed properly Jones has potential to develop, grow, and add additional sites in the future. Internal and external references about Jones engineering have been beneficial in consideration for a loan. II. Problem Statement Recently the continued growth in sales has raised accounts receivable and inventories considerably. This decrease in inventory turnover has caused accounts payable to rise due to heavy reliance on credit from suppliers. There are many ways in which you can lower the size of the line of credit needed. Good management can lower the credit line needed by lowering the inventories and accounts receivables, which grew in 2005 and 2006 because Jones is trying to increase production and growth by pushing the products to the customers. In 2003 Nelson Jones was involved in an argument with his partner Dave Verden and Jones agreed to buy out his partner for $250,000, paying him $2,000 a month with an 8% per year interest rate. It will take Jones 10.83 years to pay back his old partner. Having that extra expense will decrease his monthly income requiring him to retain a higher loan amount. Since the market for Jones Electrical

Presented by: Ben Nalty, Nick Weyrens, Chris Mlincsek, Besian Nushi Page

Jones Electrical Distribution

Distribution is fragmented, Jones is trying to increase its inventory. Inventory turnover ratio for 2005 is (1535/278=5.52) and for 2006 is (1818/379=4.79). It shows that Jones has been overconfident in their predictions. Increasing the inventory is a reason that the company is facing cash money shortage. All of these have dramatically increased days payable out standing. In past history Jones took advantage of a 2% discount if supplies were fully paid off tens days upon purchase. With the growth of business and the decrease in Cash Flows, payments for supplies exceed the discount period. The discount that is disregarded only increases the accounts payable and further decreases cash flow. In 2006 Metropolitan Branch Bank issued a loan of $250,000 to Jones in order to finance its growth in sales. Heavy credit dependency on suppliers will continue to draw request for larger loans and Jones must keep its line of credit at a lower rate to increase cash flows. The risk in issuing a $350,000 loan with a company of Jones size could be decreased in hope of creating a long term relationship. Also, the company has also lowered the Cash Conversion Cycle from 100.12 days (during 2005) to 95.01 days (during 2006). In 2005, days payable outstanding was around ten days and fell under the discount agreement with suppliers. In 2006, the number of days it was taking Jones to repay its suppliers had increased to 24. The nominal cost lost in forgoing the discount was 37.2% of cost of goods sold, or $67,600. The first quarter in 2007 shows another increase in sales with another increase of accounts payable. Certain changes or improvements should be made to ensure future stability. III. Assessment Changes to the line of credit could be made or agreed upon. Jones Electrical Distribution should re-evaluate a deal with suppliers for a 1% discount and a twenty day

Presented by: Ben Nalty, Nick Weyrens, Chris Mlincsek, Besian Nushi Page

Jones Electrical Distribution

time frame of eligibility. The line of credit can be lowered also by using a home equity loan in which Mr. Jones home is put up for collateral if he fails to make the payments. The line of credit you receive would be the net worth of your house minus the mortgage amount left on your home, which would be, $199,000 less $117,000 giving you a total of $82,000. When acquiring about a $350,000 loan being able to reduce that price by $82,000 is quite significant. After accepting a large loan of $350,000, the president of Jones Electrical Distribution, is going to have to make cut backs and changes in everyday life. One area that we feel that you could improve in is your purchasing of inventory. There seems to be a huge influx of additions to your inventory, and based on the decrease in your inventory turnover ratio, the increase of inventory seems to be a bit unnecessary. Looking at the financial statements we feel that you could improve your cash flows by buying the appropriate amount of inventory. Although you are expected to continually grow, we feel that if you purchased inventory in proportion to the growth that your company expects, it would improve your inventory turnover rate. Doing this would help you be more profitable. Another area of concern for us is your collections policy. We feel that if you enforced a more strict collections policy that it would improve other areas of your finances. By the looks of it, it appears that the lack of enforcement has deducted your available cash which has forced an inhibition of payment during the discount period on your credit line. We feel that you need to take the necessary steps to collect on your Accounts Receivables in a timely manner, so that you may take advantage of the discount period. According to our calculations you are forgoing approximately $67,000 by

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Jones Electrical Distribution

capitalizing on the discount period. Although this would not completely remedy your need for additional finances, we feel that it would reduce it significantly. After speaking to associate Jim Lyons who is an established customer at Southern Bank and Trusts he ensured that Jones was managed by a man that lived a modest lifestyle and is considered a hands-on manager of great innovation in the electrical field. We also spoke to some of the manufacturers in which Jones purchases products from; the administrators at such manufacturers explained to us that exceptional at expense management has always been a top priority for you and your company. This leads us to believe that you are an outstanding candidate for our loan and that we would be grateful to accept your business.

2004 Quick Ratio (475-243)/222= 1.05 1624/243= 6.68 Days Sales Outstanding 187/(1624/365)= 42.03 36/(1304/365)= 10.08 1624/113= 14.37 Return on Asset NI/Avg. TA= 2.4 Return on Equity NI/SE= 7.6

2005 (562-278)/294= 0.97 1916/278= 6.89 231/(1916/365)= 44.01 42/(1535/365)= 9.99 1916/103= 18.6 NI/Avg. TA= 4.4 NI/SE= 13.6

2006 (666-379)/407= 0.64 2242/379= 5.92 264/(2242/365)= 42.98 120/(1818/365)= 24.09 2242/118= 19 NI/Avg. TA= 3.8 NI/SE= 12.3

Inventory Turnover

Days Payable Outstanding

Fix Asset Turnover

Formula for the Nalty, Nick Weyrens, Chris Mlincsek, Besian Nushi Page 4 Presented by: Ben Cash Conversion Cycle: CCC=(InvAP/COGS/365)+ (AR/Sales/365)

Jones Electrical Distribution

Appendixes: A

II. Income Statement (As % of Sales) 2004 100 80.3 19.7 16.75 1.66 1.29 0.43 0.86 2005 100 80.11 19.89 16.02 1.57 2.3 0.78 1.51 2006 100 81.09 18.91 15.48 1.58 2.05 0.71 1.34

Net Sales CoGS Gross Profit Operating Expenses Interest Expenses Net Income Provision for Income Taxes Net Income Balance Sheet (As % of Sales)

Cash Account Receivables Inventory Total Current Assets Property & Equipment Acc. Depr. Total PPE, net

2004 7.65 31.8 41.33 80.78 31.8 12.59 19.22

2005 7.97 34.74 41.8 84.51 30.38 14.89 15.49

2006 2.93 33.67 48.34 84.93 32.14 17.09 15.05

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Jones Electrical Distribution

Total Assets Accounts Payable Line of Credit Pay Accrued Expenses Long Term Debt Current Liabilities Long Term Debt Total Liabilites Net Worth Total Liabilities & Net Worth 100 6.12 25.34 2.21 4.08 37.76 30.95 68.71 31.79 100 100 6.32 32.18 2.11 3.61 44.21 23.76 67.97 32.03 100 100 15.31 31.76 1.79 3.06 51.91 17.09 69.01 30.99 100

Appendixes: B

III. Statement of Cash Flows 2005 Cash Flow From Operations Net Income Additions to Cash Depreciation Increase in Accounts Receivable Increase in Accounts Payable Accrued expenses Subtractions From Cash Increase in Inventory Net Cash from Operations Cash Flow From Investing Equipment Cash Flow From Financing Line of Credit Payable Net Cash Flow 268 29 2006 30

99 231 42 14

134 264 120 14

278 53

279 23

202

252

214

249 75

67822522.doc
Presented by: Ben Nalty, Nick Weyrens, Chris Mlincsek, Besian Nushi Page

Appendixes: C