Jones Electrical Distribution Case Essay
Jones Electrical Distribution is a small company involved in wholesales of electrical devices and appliances. Even though Jones Electrical has been able to turn a profit over the past few years, they have noticed a shortage of cash when attempting to take advantage of trade discounts. Their current bank is unable to extend financing over $250,000, and Jones believes they will need considerably more to finance their operations. Therefore, Nelson Jones has decided to search for additional debt financing by discussing his options with a larger regional bank.
Jones Electrical Distribution is the middleman between many different wholesalers and general contractors. Due to Nelson Jones’s dedication …show more content…
Along with Inventory and Receivables Accounts Payable require additional analysis. With little cash on hand Jones’s practice of taking trade discounts can put the company in further financial trouble. Therefore, it is necessary to determine whether or not this practice is beneficial for the business. As stated in Appendix 5, the cost of forgoing trade discounts is 37.24% which is a lot more than 7.5% bank financing. Hence, Jones needs to keep taking advantage of trade discounts.
Our analysis shows that Jones Electrical Distribution does require additional financing to support its growth. However, according to the AFN formula $350,000 may be more than the company needs. We estimate AFN to be $77,340 (see Appendix 6) which is less than the $100,000. Instead of taking out a $350,000 loan, Jones only needs $327,340 in total financing. In fact, it is possible to further reduce this amount. Adopting a more conservative growth strategy, minimizing operating expenses to increase profit margin, and optimizing capital intensity are just a few ways to achieve this.
It is also important to consider potential negative consequences of not re-paying the loan. Since Jones Electrical Distribution is a sole proprietorship, Nelson Jones may be required to liquidate his own assets in case of default on the loan. Considering that Nelson