Jones Electrical Distribution Case Study

Case #2

September 9, 2012

Jones Electrical Distribution is an electrical components and tools distributor to general contractors and electricians. The company must have high sales during the spring and summer months with quick inventory turnover to be successful. The financial health of Jones Electrical Distribution can be referred to on the next page. There you will see the income statement for 2004, 2005, and 2006 as the percentage of sales. You will also see the balance sheet as a percentage of total assets for the same three years. Following the balance sheet are the calculated financial ratios for 2004, 2005, and 2006. Through the financial statements and ratios a few numbers instantly draw attention. The Days Payable Outstanding goes from around 10 days to 24 in 2006. This can be from not being able to pay their manufactures because of the 15% increase in sales from 2005 to 2006 which requires the same increase in inventory. The quick ratio also decreases in 2006. With the new line of credit Jones wants to finance debt with more debt. The increase in accounts receivable and inventory in 2005 and 2006 were caused by the sales growth of $2.24 million in 2006. The effective annual rate of interest if Jones pays on the due date rather than on the 10 day discount is 27.24%. The $350,000 should be sufficient for 2007. Jones could reduce that by buying securities and other outside funding. Jones will have to cut spending without having to cut sales with his new larger line of credit.