Jones Electrical Distribution

Jones Electrical Distribution
Dr. C. Bulent Aybar

Professor of International Finance
Context
Jones Electrical Distribution has been expanding rapidly for
the past several years.
Increases in working capital requirements have significantly
outrun the capacity of the company to generate funds from
internal sources.
The company has been forced to forgo taking discounts on
accounts payable and to borrow in increasing amounts from
its bank to maintain its expansion.
Jones must decide whether to continue to expand and, if so,
how to finance the growth.
Dr. C. Bulent Aybar
Impact of Growth on Jones: Investment Requirements

Inventories + Accounts Receivables
2004
2005
2006
$430
$509
$643
Investment in inventory and A/R has been growing at a rate of

~22% . (current assets has grown at 18.4%) > Sales growth of
17.49% for the same period
Fixed Assets
Net Fixed
Assets
Acquisitions
2004
2005
2006
$113
$103
$118
Growth in fixed assets is moderate!
$15
$50
Dr. C. Bulent Aybar
Working Capital and Sales Growth

2004
2005
2006
WC/Sales
26.47%
26.54%
28.67%
FA/Sales
6.96%
5.37%
5.26%
Sales
$1,624
$1,916
$2,242
COGS
$1,304
$1,535
$1,818
A/R
$187
$231
$264
Inventory
$243
$278
$379
A/P
$36
$42
$120
ACP
42
44
43
5.37
5.53
4.80
DSI
68
66
76
APP
10
10
24
CCC
100
100
95
WCR
$381
$453
$509
23.47%
23.63%
22.70%
Inv.Turnover
WCR/Sales
What is the impact of

slowing inventory
turnover and collection
period on Joness
investment requirements?
WC Investment is Growing Faster than Sales!
Accounts receivable
Sales
Change in accounts receivable as pct of sales
2004
$187
2006
$264
Change
$77.3
$1,624
11.51%
$2,242
11.78%
0.27%
12/31/06 Accounts Receivable at 12/31/04 pct of Sales
$258.0
Actual 12/31/06 Accounts Receivable

Accounts Receivable due to increased receivables as % of sales
$264.1
$6.1
Inventory
Sales
Change in Inventory as % of sales
2004
$243
2006
$379
Change
$135.7
$1,624
14.96%
$2,242
16.89%
1.93%
12/31/06 Inventory at 12/31/04 pct of Sales
$335.4
Actual 12/31/06 Inventory
$378.6
Contribution of Declining Efficiency: 23.2%

Change in companys working capital is $212.9 (~213K)
The companys financing needs were increased by 2.20% of
sales, or $49.3 thousand by the longer collection period and
slower inventory turn in 2005 and 2006.
The figure of $49.3 thousand amounts to only 23.2% of the
total increase in accounts receivable and inventories of $213
thousand between December 31, 2004 and December 31,
2006;
Therefore sales growth accounts for the a substantial
majority of the additional funds invested in receivables and
inventories.
Dr. C. Bulent Aybar
Does Jones Generate Sufficient Cash Flows?
2005
2006
2005-06
Net Income
Depreciation
Inventory
Accounts receivable
Trade credit (Accounts payable)
Accrued expenses
Cash flows from operations
$29
$25
($35)
($44)
$6
$1
($18)
$30
$35
($101)
($33)
$77
$1
$9
$59
$60
($136)
($77)
$84
$1
($9)
Capital expenditures
Cash flows from investing activities
($15)
($15)
($50)
($50)
($65)
($65)
Bank borrowing (Line of credit)

Reduce long-term debt
Cash flow from financing activities
$65
($24)
$41
$35
($24)
$11
$100
($48)
$52
Is Jones Assessment of Funding Need Accurate?

Maybe if Jones continues to rely heavily on trade credit as a
source of funds, as he has been during recent years
Probably no if he decides to pay his accounts payable
promptly in order to take advantage of the 2% discount
offered on payments made within 10 days of the date of
invoice.
How can we tell?
Dr. C. Bulent Aybar
Before we move on to assessment of funding need..

What is the cost of not taking the discount for Jones?
Assume $1000 purchase
Take discount pay $980 on day 10
Do not take discount pay $1,000 on day 30
Not taking the discount costs $20 for 20 days of $1,000

purchase, or 2% per 20 days
Annualized cost 2% x (365/20)=36.5%
If APP is stretched to 40 days cost s ~24%
Dr. C. Bulent Aybar
Assumptions for Forecasting Funding Need

Sales
Operating Expenses
Interest Expense
2,700,000
15.46%
31,000
ACP
43
DSI
76
Principal Paid
24,000
Cash
32,000
Net PPE
COGS/Sales with discount
COGS/Sales without
discount
Tax Rate
110,000
81.11%
83.11%
35%
Income Statement
Net sales
Cost of goods sold
2007
2,700,000
2,189,970
2007
2,700,000
2,243,970
Gross profit on sales
510,030
456,030
Operating expense b
417,310
417,310
Interest expense
31,000
31,000
Net income before taxes
61,720
7,720
Provision for income taxes
21,602
2,702
Net income
40,118
5,018
Pro Forma Balance Sheet

Take Discount
23,000
318,082
455,994
797,076
No Discount
23,000
318,082
467,238
808,320
Accumulated depreciation
Total PP&E, net
118,000
118,000
Total assets
915,076
926,320
Accounts payable
Line of credit payable
Accrued expenses
Long term debt, current portion
Current liabiliities
59,999
249,183
14,000
24,000
347,183
184,436
249,183
14,000
24,000
471,619
Long-term debt
Total liabilities
110,000
457,183
110,000
581,619
Cash
Accounts receivable
Inventory
Total current assets
Property & equipment

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Jones Electrical Distribution

Dr. C. Bulent Aybar

Dr. C. Bulent Aybar

Impact of Growth on Jones: Investment Requirements

Investment in inventory and A/R has been growing at a rate of

Growth in fixed assets is moderate!

Dr. C. Bulent Aybar

Working Capital and Sales Growth

What is the impact of

WC Investment is Growing Faster than Sales!

12/31/06 Accounts Receivable at 12/31/04 pct of Sales

Actual 12/31/06 Accounts Receivable

12/31/06 Inventory at 12/31/04 pct of Sales

Actual 12/31/06 Inventory

Contribution of Declining Efficiency: 23.2%

Does Jones Generate Sufficient Cash Flows?

Bank borrowing (Line of credit)

Is Jones Assessment of Funding Need Accurate?

How can we tell?

Dr. C. Bulent Aybar

Before we move on to assessment of funding need..

Not taking the discount costs $20 for 20 days of $1,000

Dr. C. Bulent Aybar

Assumptions for Forecasting Funding Need

Gross profit on sales

Net income before taxes

Provision for income taxes

Pro Forma Balance Sheet

Property & equipment

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