QUESTION 2 Jones Electrical, though having more rapid growth and expected to increase in future would need more than 250,000 to meet his needs. First of all he has to repay his ex partner after buying him out. Jones bought Dave Verdent, his former business partner out for $250,000. 00. His repayment plan was a $2000.00 per month with 8% interest per annum. The interest rate he is paying is relatively high and this means it will take Jones over ten years to repay this loan with an interest payment in excess of $200,000.00 in interest only. From the financial information provided in the Balance Sheet of Jones Electrical Distribution it shows that there was an increase in accounts receivables, inventory, property and equipment. This increase would permit an increase also in liabilities and equity to be able to finance the assets.
On the other hand, the balance sheet also shows in increase in accounts payable, line of credit payable and accrued expenses. The above increases would therefore warrant financial assistance from the Bank for the expansion of the business. With the loan, Jones will be allowed more flexibility in the operations of the business. He will then be able to increase his assets in the form of inventory and capital, which in turn will result in his business being in a better position to finance its operations. In addition, Jones Electrical will be able to benefit from the trade discounts which are offered by his suppliers because this arrangement would allow him to pay his creditors. They need the loan to help the company manage and expand its operations and pay off his debts.
QUESTION 3 With respect to the early payment discount of only 2%, it is advisable that the Company, continue to credit its supplies and make alternative arrangements with respect of repayment to its suppliers. The company needs cash and the discount of the 2% does not put the company in a better financial position. It is always important to inject equity so that your company will be able to increase its assets, which will eventually lead to an increase in sales and revenue. Another issue is that with respect to the proposed growth of the company, Jones had predicted forecasting in sales to increase significantly therefore the urgent need for a very large cash flow into the company would help significantly.
In 2006 Metropolitan Branch Bank issued a loan of $250,000 to Jones in order to finance its growth in sales. Heavy credit dependency on suppliers will continue to draw request for larger loans and Jones must keep its line of credit at a lower rate to increase cash flows. The risk in issuing a $350,000 loan with a company of Jones size could be decreased in hope of creating a long term relationship. Also, the company has also lowered the Cash Conversion Cycle from 100.12 days (during 2005) to 95.01 days (during 2006). In 2005, days payable outstanding was around ten days and fell under the discount agreement with suppliers. In 2006, the number of days it was taking Jones to repay its suppliers had increased to 24. The nominal cost lost in forgoing the discount was 37.2% of cost of goods sold, or $67,600.
QUESTION 4 The line of credit can be lowered also by using a home equity loan in which Mr. Jones home is put up for collateral if he fails to make the payments. The line of credit you receive would be the net worth of your house minus the mortgage amount left on your home, which would be, $199,000 less $117,000 giving you a total of $82,000. When acquiring about a $350,000 loan being able to reduce that price by$82,000 is quite significant. After accepting a large loan of $350,000, the president of Jones Electrical Distribution, is going to have to make cut backs and changes in everyday life Jones Electrical forecasts predicted that its sales would increase with favourable prospects and at the same time the company was in dire need of a significant cash inflow.
It is however advisable that Jones Electrical accepts the offer made by Southern Bank and Trust despite the specific restrictions that would be placed on the Company. This offer would provide for long term financing of the company and as a result the limitations with respect to borrowing would eventually be removed, thus enabling the Company to utilize the credit line specifically if it foresees forecast would be favourable. With the increase in bank borrowing, this can contribute to a number of aspects. One main aspect is the increase in sales, which in turn will result in increase revenue. Increase in bank borrowing can result in a decrease in cash flow and this will help them repay the loan. Another area of concern for us is your collections policy. We feel that if you enforced a more strict collections policy that it would improve other areas of your finances. By the looks of it, it appears that the lack of enforcement has deducted your available cash which has forced an inhibition of payment during the discount period on your credit line.