Sheet1 Income Statement Ratios Cash Flow 200420052006 net Sales 1,6241,9162242 gross pm Operations COGS 1,3041,5351818 operting profit net income Gross Profit 320381424 pm depreciation...

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                                                    Income Statement                                        Ratios                                Cash Flow
                                                            2004    2005    2006
                                                    net Sales        1,624    1,916    2242                        gross pm                                Operations
                                                    COGS        1,304    1,535    1818                        operting profit                                net income
                                                    Gross Profit        320    381    424                        pm                                depreciation
                                                    Operating Expenses        272    307    347                        asset turn                                inc in a
                                                    EBIT        48    74    77                        ROA                                inc in inv
                                                    Interest Expense        27    30    31                        ROE                                inc in a/p
                                                    EBT        21    44    46                                                        inc in accrued
                                                    taxes        7    15    16                        cash coverage                                CF ops
                                                    EAT        14    29    30                        Times interest earned
                                                                                                                            Purchase PPE
                                                    balance sheet                                        Cu
ent                                financing
                                                    Cash        45    53    23                        Quick                                Pay LTD
                                                    A/R        187    231    264                        NWC/TA                                issue line
                                                    Inventory        243    278    379                        Debt/equity                                dividend
                                                    Tot CA        475    562    666                                                        CF Financing
                                                                87                            inventory turn
                                                    PPE        187    202    252                        Days in Inv                                net CF
                                                    Acc Dep        (74)    (99)    (134)
                                                    PPE, net        113    103    118                        A/R turns                                Beg Cash
                                                    Total Asssets        588    665    784                        days in a
                                                                                                                            End Cash
                                                    A/P        36    42    120                        a/p turns
                                                    Line        149    214    249                        days in a/p
                                                    Acccrued Exp        13    14    14
                                                    LTD- Cu
ent        24    24    24
                                                    Total CL        222    294    407
                                                    LTD        182    158    134
                                                    Total Liab        404    452    541
                                                    Net Worth        184    213    243
                                                    Total Liab and Worth        588    665    784
                                                    Income Statement                            Ratios                                Cash Flow
                                                            2004    2005    2006
                                                    net Sales        1,624    1,916    2242            gross margin                                Operations
                                                    COGS        1,304    1,535    1818            operting profit margin                                net income
                                                    Gross Profit        320    381    424            profit margin                                depreciation
                                                    Operating Expenses        272    307    347            asset turnover                                inc in a
                                                    EBIT        48    74    77            ROA                                inc in inv
                                                    Interest Expense        27    30    31            ROE                                inc in a/p
                                                    EBT        21    44    46                                            inc in accrued
                                                    taxes        7    15    16            cash coverage                                CF ops
                                                    EAT        14    29    30            Times interest earned
ent                                Purchase PPE
                                                    balance sheet                            NWC/TA                                financing
                                                    Cash        45    53    23            Debt/equity                                Pay LTD
                                                    A/R        187    231    264                                            issue line
                                                    Inventory        243    278    379            inventory turn                                dividend
                                                    Tot CA        475    562    666            Days in Inv                                CF Financing
                                                    PPE        187    202    252            A/R turns                                net CF
                                                    Acc Dep        (74)    (99)    (134)            days in a
                                                    PPE, net        113    103    118                                            Beg Cash
                                                    Total Asssets        588    665    784            a/p turns
                                                                                days in a/p                                End Cash
                                                    A/P        36    42    120
                                                    Line        149    214    249            Others?
                                                    Acccrued Exp        13    14    14
                                                    LTD- Cu
ent        24    24    24
                                                    Total CL        222    294    407
                                                    LTD        182    158    134
                                                    Total Liab        404    452    541
                                                    Net Worth        184    213    243
                                                    Total Liab and Worth        588    665    784

    Industry Data    For comparison, calculate the ratios for Jones using the same formulas given here. They may be slightly different from the textbook formula.
    From RMA annual Statements - Available at MSOE Li
    Common Size Balance Sheet    % of Assets
    Cash    7.4
    Accounts Receivable    37.4
    Inventory     33.6
    Other Cu
ent Asset    2.2
    Total Cu
ent Asset    80.6
    Fixed Assets    11.7
    Intangible Assets    3.2
    All other Long Term Assets    4.5
    Total Assets    100
    Note Payable Short term    14.2
ent Maturities of Long Term Debt    2.4
    Accounts Payable    23.6
    All other cu
ent liabilities    9.5
    Total Cu
ent liabilities    49.7
    Long term Debt    10
    Other Long term Liabilities    5.4
    Total Liabilities    65.1    This is also Debt to Asset ratio
    Equity ( Both Common Stock and Retained Earnings)    34.9    This is equity to assets
    Total Liabilities and Equity    100
    Common Size Income Statement    % of Sales
    Net Sales    100
    COGS    71.1
    Gross Profit    28.9    This is also gross profit margin
    Operating Expense    24.2
    Operating Profit (EBIT)    4.7
    Other Expense    0.5
    Profit before tax (EBT)    4.2    This is also profit margin before tax
ent     1.7
    Quick    0.9
    A/R Turnover    7.9
    Days Sale Outstanding (Days in A/R)    46
    Inventory Turnover    6.6
    Days sales in Inventory    55
    Accounts Payable Turnover    10
    Days in Payables    36
    Times Interest Earned (EBIT/interest)    5.1
    Debt to Equity    1.8
    Fixed Asset Turnover (Sales /Fixed Assets)    41.1
    Total Asset Turnover (Sales/Total Assets)    2.9
    Return on Equity (EBT/Equity)    26.1%
    Return on Assets (EBT/Total Assets)    9.0%

Jones Electrical Distribution

HBS Professor Thomas R. Piper and writer Jeffrey DeVolder prepared this case solely as a basis for class discussion and not as an endorsement, a
source of primary data, or an illustration of effective or ineffective management. The authors thank John A. Schweig of W. W. Grainger, Inc.
(HBS MBA 1983), and Mary A. Noonan of A
ow Electronics (HBS MBA 1990), for their valuable contributions to the development of this case.
This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional
eferences to actual companies in the na

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T H O M A S R . P I P E R
Jones Electrical Distribution

After several years of rapid growth, in the spring of 2007 Jones Electrical Distribution anticipated
a further substantial increase in sales. Despite good profits, the company had experienced a shortage
of cash and had found it necessary to increase its bo
owing from Metropolitan Bank—a local one-
anch bank—to $250,000 in XXXXXXXXXXThe maximum loan that Metropolitan would make to any one
ower was $250,000, and Jones had been able to stay within the limit only by relying very heavily
on trade credit from the manufacturers from whom Jones purchased the electrical products it sold to
its customers. Nelson Jones, sole owner and president of the company, was therefore looking
elsewhere for a new banking relationship that would allow him to negotiate a larger loan.
Jim Lyons, a homebuilder who was a friend of Jones, introduced Jones to Rachel Montrose,
Lyons’s relationship officer at the local
anch of Southern Bank & Trust—a large, regional bank.
Southern had a 7-year relationship with Lyons, including a cu
ent loan balance of over $3 million.
Jones and Montrose tentatively discussed the possibility that Southern might extend a line of credit to
Jones up to a maximum amount of $350,000. Jones thought that a loan of this size would more than
meet his needs for at least the next year, and he was eager for the flexibility that a line of credit of this
size would provide. After discussion, Montrose had a
anged for the credit department of Southern
Bank & Trust to investigate Nelson Jones and his company.
Background of Jones Electrical Distribution
Jones Electrical Distribution was founded in 1999 as a partnership between Nelson Jones and his
college roommate, Dave Verden. In 2003, Jones and Verden had a disagreement on how aggressively
they should grow the business, and Jones ultimately bought Verden out for $250,000. They agreed
that Jones would pay Verden the $250,000 in installments of $2,000 per month plus interest of 8% per
The business sold electrical components and tools to general contractors and electricians. The
products, which included items such as controllers,
eakers, signal devices and fuses, were
purchased from nearly 100 different suppliers. Jones’s customers used the products in the
4179 | Jones Electrical Distribution
construction and repair of commercial and residential buildings. To a degree, Jones’s sales followed
the seasonality of its customers’ businesses which had their highest activity during the spring and
summer when weather was most conducive for construction work.
The market in which Jones competed was large, fragmented, and highly competitive. Jones faced
significant competition from national distributors, home centers, and other small supply houses. In
spite of the competition, Jones had built up sales volume by successfully competing on price and
employing an aggressive direct sales force who often visited customers at their job sites. In order to
compete on price, Jones maintained tight control over operating expenses, including paying his
salesforce primarily on commission and keeping overhead to a minimum. In addition, as part of his
expense management effort, Jones had historically paid his suppliers within 10 days of the invoice
date in order to take full advantage of the 2% discounts they offered for quick payments. Jones had
also proved adept at demand forecasting and inventory management, allowing him to satisfy his
customers’ demand with a modest amount of inventory relative to his larger competitors.
Jones’s focus and dedication to his business allowed him to build it into a profitable operation.
Jones Electrical Distribution had grown to $2.24 million in sales and $30,000 of net income in 2006.
Operating statements for years XXXXXXXXXXand for the three months ending March 31, 2007, are given
in Exhibit 1.
Financing the Business Through Southern Bank & Trust
To solve his financing need, Jones wanted to develop a relationship with a larger bank that would
not run into issues with maximum loans to a single bo
ower as he had experienced with
Metropolitan Bank. He wanted to build a relationship with a bank that could grow with him,
including to more locations if he decided to add additional sites in the future.
As part of its customary due diligence of Jones Electrical Distribution, the Southern Bank &
Trust’s credit department asked Jones’s friend Jim Lyons for a reference on Jones. Lyons’s reference
included the following comments: “Nelson is a businessman of the highest integrity and sharp
acumen who is a very hands-on manager of his operation. He has excellent knowledge of the
products he sells and provides customers with excellent service. He also lives a modest lifestyle.”
The bank also toured Jones Electrical Distribution’s warehouse and office and interviewed the
area sales managers for three of the manufacturers from whom Jones bought the products he sold.
The managers were unanimous in their favorable opinion of Jones. One of them said: “Nelson has
een one of our best performing wholesalers. He really knows how to build relationships and close a
sale. He has also been great with his expense management. The guy does not spend a dime unless
he absolutely has to. We look forward to building a bigger relationship with him in the future.”
In addition to the electrical distribution business, which was Jones’s only source of income, Jones
held jointly with his wife an equity in their home. The house had cost $199,000 to build in 1999 and
was mortgaged for $117,000. He also held a $250,000 life insurance policy, payable to his wife.
Otherwise, they had no sizeable personal investments.
Southern Bank & Trust gave particular attention to the debt position and cu
ent ratio of the
usiness. It noted the ready market for the company’s products at all times and the fact that sales
prospects were favorable. The bank’s investigator reported: “Sales are expected to reach $2.7 million
y the end of 2007.” On the other hand, it was recognized that a general economic downturn might
slow down the rate of increase in sales. Projections beyond 2007 were difficult to make, but the
Jones Electrical Distribution | 4179
prospects appeared good for continued growth in the volume of Jones Electrical Distribution’s
usiness over the foreseeable future.
The bank also noted the rapid increase in Jones Electrical’s accounts payable and line of credit in
the recent past. Jones Electrical’s main suppliers had terms of 30 days net and provided a 2%
discount for payments made within 10 days of invoice date. These terms
Answered 4 days AfterApr 12, 2022


Sandeep answered on Apr 16 2022
10 Votes
    Industry Data    For comparison, calculate the ratios for Jones using the same formulas given here. They may be slightly different from the textbook formula.
    From RMA annual Statements - Available at MSOE Li
ary            From Jones Electrical Distribution annual Statements
                                % of Assets
    Common Size Balance Sheet    % of Assets        Common Size Balance Sheet    2004    2005    2006    2004    2005    2006
    Cash    7.4        Cash    45    53    23    7.7%    8.0%    2.9%
    Accounts Receivable    37.4        Accounts Receivable    187    231    264    31.8%    34.7%    33.7%
    Inventory     33.6        Inventory     243    278    379    41.3%    41.8%    48.3%
    Other Cu
ent Asset    2.2        Total Cu
ent Asset    475    562    666    80.8%    84.5%    84.9%
    Total Cu
ent Asset    80.6
    Fixed Assets    11.7        Property and Equipment    187    202    252    31.8%    30.4%    32.1%
    Intangible Assets    3.2        Accumulated Depreciation    (74)    (99)    (134)    -12.6%    -14.9%    -17.1%
    All other Long Term Assets    4.5        Total PP&E,net    113    103    118
    Total Assets    100        Total Assests     588    665    784    100%    100.0%    100.0%
    Note Payable Short term    14.2        A/P    36    42    120    6.1%    6.3%    15.3%
ent Maturities of Long...

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