Jones Electrical Distribution

Jones Electrical Distribution

Nelson Jones is the sole owner and president of Jones Electrical Distribution. Jones is experiencing a shortage of cash, which is needed to sustain anticipated growth in sales for the coming year. The company is in need of a new bank relationship because its current lender, Metropolitan Bank, is unwilling to provide Jones with the proper loan amount to maintain growth. Jones is introduced to Rachel Montrose, the relationship officer at the local branch of Southern Bank and Trust. Montrose discusses the possibility of extending a line of credit to Jones up to a maximum amount of $350,000. After being inspected by the credit department of Southern Bank and Trust, Montrose sets out the standard covenants applying to the loan. If Jones decides to enter into a deal with Southern Bank and Trust, then he must severe his relationship with his previous lender, Metropolitan Bank.

Jones is a sole proprietorship that sells electrical components and tools to general contractors and electricians (ex. Controllers, breakers, signal devices, and fuses). Jones purchases from nearly 100 different suppliers. Jones sales followed the seasonality of its customers' businesses, which had their busiest time during summer and spring when the weather is ideal for construction work. Its market is large, fragmented, and highly competitive.

Jones competes on price and by employing an aggressive direct sales force, often visiting customers on job sites. He relies on tight control of operating expenses, including paying sales force primarily through commission, in order to compete on price. Also relies on early orders to get a 10 day, 2% discount.

The company's sales, profit, and income have all increased on a steady basis. Even in the first quarter of 2007, there is a substantial increase of sales and net income. The bank investigator was even quoted as saying, "Sales are expected to reach 2.7 million by the end of 2007." But, Jones's current ratio shows a declining trend, which is alarming. Jones's current liabilities are rising faster than its current assets. This is due to Jones's being unable to finance the growth of his company without taking on more long-term debt. This should be alarming to lenders because it shows a decreasing trend in short-term solvency. There is an upside and that is there is always a ready market for the company's products.

Jones's inventory turnover ratio suggests that he is continuing to do a better job of managing his inventories. This is so because even though Jones's sales are increasing, his inventory turnover ratio is decreasing. And even though Jones's sales are seasonal to a degree, it is stated in the case that there is always a ready market for Jones's products.

A rapid increase in accounts payable will cause the company to need additional funds. Also, a shortage of funds arising from the additional investments in working capital associated with the company's increased sales volume. According to the statement of cash flows for 2005-06, the amount of $116,000 is what Jones will have in equity for the year 2007. This will not be enough to continue the company's operations for 2007 because of the outstanding debt of $407,000. Because of this, a profit of $30,000 will be insufficient to finance future growth.

In regards to Mr. Jones repaying off his long-term debt, it cannot be done at his current rate of operations. Mr. Jones's