Founded in 1999, Jones Electrical Distribution (J.E.D.) operates in electrical components and tools industry, manufacturing items used in the construction and repairing of commercial and residential buildings. Following the seasonality of the construction work, the sales of the company are strongly dependent from the seasons with the highest degree of the activity in spring and summer.
The market where the J.E.D. operates is large, fragmented and highly competitive and the company faces significant competition from different agents. The company has built up sales volume by successfully competing on the price and using an aggressive direct sales force. …show more content…
would have much limitations concerning borrowing from the Southern Bank &Trust ; additional investments in fixed assets could only be made with prior approval of the bank, consumption of the credit line would have a limit of $350,000 of Accounts Receivable and 50% of Inventory and also, there will be limitations on withdrawals of funds from the business by Jones.
Alter running financial statements for 2007, N. Jones should forgo taking the trade discounts. Although it would seem advantageous to pay suppliers within the discount period, 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 the external financial resources needed in order to take the discounts is $389,000; Southern Bank & Trust was only will to extend of line of credit to the amount of $350,000.
How well is Jones Electrical Distribution performing?
Jones Electrical Distribution is performing fairly well. The company has very low profit margins, but this is due to the nature of the industry and the high competition that J.E.D. faces. In order to succeed, the company should keep its costs down and prices low, which would allow it to compete in the industry since it is so …show more content…
What could Jones do to reduce the size of the line of credit he needs?
There are not many things that could keep less inventories. Jones has inventory of $ 432 000. He could release some inventories in order to free some cash. This will give him competitive advantage to increase the capital.
7. What are the implications for Jones’s lifestyle of accepting the new, larger line of credit?
The impact on Jones’ way of work has several components. He cannot for examples increase his net income even though he is the boss if that has direct effect on his possibility to repay loan. He should focus on Jones Electrics expansion. Thus bigger operation provides sustainable growth equal to the scale of the company. In future the income will be higher only if currently keeping his and focus on the internal operations.
In conclusion, Jones business is profitable but the amount of finance necessary to operate the business with such a low profit does not correspond to the low profits. Jones has to find a way to rearrange his operations in such a way that he reduces receivables and inventory. Additional line of credit will not align this problem but will most probably deepen