Jones Electrical Distribution Harvard Case Solution & Analysis

Reflection Essay – Jones Electrical Distribution

Jones Electrical Distribution Company acts as a wholesale trader of electrical goods bought from manufacturers who are in fact suppliers of nearly 100 electrical goods and they sell to customers primarily in the construction and repair of commercial and residential buildings. The sales to customers are relied heavily upon the seasons conductible for repairs and construction works.

Over the recent years, Jones has tried to maintain a sustainable position in the competitive market through efficient price war theology which made him control the operational expenses by availing 2% cash discount upon payment to suppliers, incur less overheads, pay its sales force mostly on sales commission and ensure availably of goods to customers as and when required. Consequently, this required Jones Electrical to have a high liquidity in order to finance the in-time payments to suppliers. It follows the need to maintain the inventory level at the optimum level as we observe the weakening Inventory Turnover ratio over the years and abort the distinct readings of Days Payable and Sales Outstanding ratios. This tends to prove one of the vital reasons to push the company out of cash and hamper its liquidity. The calculations of the ratios indicate that Jones paid off the purchases and availed the discount through supplier’s credit policy of 2/10, n/30. On the other hand, the business failed to collect its receivables well in due time. The Sales remain outstanding for nearly 43 days after being sold. The widening gap (43 days and 10 days) signifies how poorly the recovery and payment system is organized such that it pushed Jones to make 4 payments to suppliers before a recovery is received from customer. The arising issue of Liquidity has been mostly due to this widening gap which pressed the company to avail Bank borrowing facility. Jones must ensure strict policies for customers and may also introduce a discount as an incentive to enhance payment recoveries.

Also, Jones operates at a lower profit margin to win the price war. In determination to have a sustainable position in the market place, Jones Electrical has operated at margins that are apparently far lesser than the industry averages (industry averages not known). As a result, it has a great deal of assets not paying off well in terms of returns (Refer ROA- Array1). The lower Return on Assets is mainly because of low profit margins and not due to Operational expenses since they are said to be well managed. This has also contributed in making Jones opt for bank borrowing.

Jones Electrical financial information also confirms the substantial amount of inventory held up for later use. This means the cash is engaged for a longer term with no yield, which then results in the requirement of more liquidity, possibly fulfilled through Bank borrowing. Jones must overlook the defect in its inventory management process and identify the Equilibrium Order Quantity (EOQ) that best meets the market demand, simultaneously leaving just adequate level of inventory left around to save one of the operational expenses (warehousing exp.). This is assumed to abruptly enhance the liquidity in the business.

As for the covenant to be signed for new Revolving credit facility, Jones Electrical has to oversee certain indicators to conclude if the decision being taken reflects the prospects for the company in the future or not. The new facility of $350,000 will only be available in completeness if the company maintains an inventory level of at least $280,000 and A/c Receivables at $280,000 (refer spreadsheet). This agreement would also require Jones to pay-off all his obligations to Metropolitan Bank through Retained Earnings, Income and borrowing from the new bank as the previous arrangement has to be severed. This would squeeze the amount that Jones may use to finance the working capital in order to upgrade sales growth rate.......................

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