JONES ELECTRICAL

DISTRIBUTION
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Contents
Introduction...............................................................................................................................................2
Jones Electrical Distribution performance and potential approach to success.....................................2
Performance...........................................................................................................................................2
Approach to Success..............................................................................................................................3
Need of loan for a business with annual profit of $30,000......................................................................4
Reasons for rise in balances of Accounts Receivables and Inventory in 2005 & 2006..........................5
If Jones’s estimate of $350,000 line of credit as sufficient requirement in 2007 accurate....................6
Time period required to repay the line of credit, if availed....................................................................6
Options Jones should explore to reduce the size of the line of credit.....................................................6
Implications for Jones’s lifestyle of accepting the new, larger line of credit.........................................7
Exhibit 1: Assumption to Model Forecast...............................................................................................8
Exhibit 2: Model Income Statement ($’000)............................................................................................9
Exhibit 2: Model Balance Sheet ($’000)...................................................................................................9
Exhibit 4: Model Cash Flow Statement.................................................................................................10
Exhibit 5: Ratios......................................................................................................................................10
Exhibit 6: Repayment timeline of line of credit in option 2 (No Discount) ($’000).............................11

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Through this paper we have made an attempt to analyze the Harvard Case Study on Jones
Electrical Distribution. While doing so we have critically reviewed the financial position of
Jones Electrical and address the following questions in addition to other observation:
a. How well is “Jones Electrical Distribution” performing? What must Jones do well to
succeed?
b. Why does a business that has profit of $30,000 per year need a bank loan?
c. What drove the increase in Jones’s accounts receivable and inventory balances in 2005
and 2006?
d. Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007 accurate?
e. When will Jones be able to repay the line of credit?
f. What could Jones do to reduce the size of the line of credit he needs?
g. What are the implications for Jones’s lifestyle of accepting the new, larger line of credit?
h. Do you think Jones should pay his suppliers early to obtain the 2% discount or pay his
suppliers in 30 days and forego the 2% discount?
i. Would you as Ms. Montrose agree to lend Jones the money?
j. Jones has been thinking about investing $200,000 in an inventory management software
system. His sales rep has guaranteed free cash flows of $60,000 per year for 5 years as a
return on the investment. The $60,000 would be a combination of reduced inventory
carrying costs, admin charges from his freight carriers and the reduction of one person in
his customer service department. Calculate the NPV assuming a 10% discount rate and
the IRR. Does the $200,000 software system seem like a good investment?
k. What would you do as Mr. Jones? Come up with your top 3 options and then pick one as your
final and best recommendations to ensure his company is successful into the foreseeable future.

ALSO ATTACHED IS AN EXCEL

Introduction
Jones Electrical Distribution, founded in 1999, has been successfully running the show with
growing sales as well as profitability. The company has been able to sustain its position amid
stiff competition and fragmented market through successful customer relationship management
with its dealers. Despite such efforts, the Company is facing severe working capital shortage to
cater to it need for reaching 2007 sales target of $2.7 million. As a result of this, on one side the
Company is in need of higher levels of debt and on the other side it has reached its limit for line
of credit facility with their banking partner Metropolitan Bank. Thus the Company is not in a
position to raise debt with their existing Bank and has an option of changing the financing
partner to Southern Bank & Trust who may extend this line of credit to a maximum $350,000 vs.
existing $250,000.

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Jones Electrical Distribution performance and potential
approach to success
Performance
Since inception in 1999, Jones Electrical have been successfully laying down the path to
profitability with growing sales and income amidst highly competitive environment. Contractors
and electricians shows sustainable preference due to it competitive pricing and highly
satisfactorily

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