Jones Electrical Case Essay

820 Words Nov 17th, 2011 4 Pages
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
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Thus, Mr. Jones was required to find more capital externally; a bank line of credit. The resulting interest payments became the second negative cash effect of not collecting his receivables. He was being penalized doubly for the lost interest on the uncollected cash and the interest he had to pay the bank.

Adding to current debt however, carried its own problems. The risk of bringing on too much current debt while not collecting cash is becoming insolvent. Although Jones Electrical was not at that point, his pattern of assuming more debt was compounding the riskiness of the business. From 04’-06’ the company lost a quarter of its liquidity according to the current ratio and 32% by the quick ratio. This presents a concern for Southern Bank & Trust as they allow Mr. Jones to assume more debt beyond 2007. However, the difficulty of the solution reverts back to the competitive nature of the market. The immediate action to remedy insolvency risk, such as implementing stricter collection policies or increasing prices, runs the risk of losing customers to other distributors. This leaves the only option of taking advantage of suppliers relaxed collection policies until the amount of receivables can be reduced.

However, no good can come without bad. When looking at forgone suppliers’ discount policy, one has to consider the loss from interest. The interest loss rate jumps

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