Analysis Of Small Enterprise: Jones Electrical Distribution

Analysis Of Small Enterprise Jones Electrical DistributionMr. Jones is having business in a large, break up and highly competitive environment. Profitability of his business depends heavily on sales volumes and costs.The sales be growing at around 18% per annum. However, the profit perimeter is non of importtained at a constant level in limits of sales maturation. Exhibit I builds that even though the sales growth was achieved in FY 2005-2006, the firm could not have higher operating profits. The sales revenue was nullified by huge rise in operating expenses.A close look at the profit and loss account reveals that the operating expenses are mainly consists of salaries and wages. It seems that in order to keep the fixed costs in control, the compensation of sales executives is quite high beca apply of link to sales volumes. The sales growth has helped the employees to earn more than to the organization.Secondly, Mr. Jones is working with more than 100 suppliers. For such a sm all volume of business, 100 suppliers are in excess. This huge number of suppliers may create businesss in tracking on accounts payable. The company is too having mediocre days payable at 22.8 days in FY 2006, as compared to 9.8 days in FY 2005. During the last two years, Mr. Jones has not been able to take advantage of guile discounts.Mr. Jones is also making payments of $ 2000 per month to Mr. Verden, along with interest payment of 8% per annum. The face amount ($250000) can be considered as a long term loan for Mr. Jones. However, it is not evident from the P L account, that the interest paid on the loan taken from Mr. Verden is accounted for income statement.Mr. Jones is also building up fixed assets everywhere a period of time however, these assets were payd through his short term financing. It can be assumed that the short term finance was assistantable readily for the operations, has been amused to create long term assets and liquidating long term debts.These facts a nd assumptions imply the Mr. Jones is having a relatively aggressive approach in working capital financing of the firm. main(prenominal) issue for Mr. Jones is to find a financing plectron for the firm. As the market is very dynamic and there is economy downturn, he is not able to foretaste demand for his products for more than one year. Although, the following year looks quite promising and a good sale is forecasted, Mr. Jones is facing issue of fluidity.Mr. Jones is of opinion that the liquidity fuss is causing the ir weak cash flows and hence he need to borrow more money for daily operations. However the forecasted cash flow (Exhibit III) can show that there is no severe cash flow problem. A focused approach to accounts payable and accounts receivables testament help Mr. Jones to overcome the liquidity problems.Around the main issue of arranging finance for the business, Mr. Jones has the additional issues of growing sales, reducing tension between the firm and suppliers, mod erating salary for the sales staff and creating a concentrated relationship with the bankers.Looking at the financial statements (Exhibit I, II, III) we can say that the financial condition of Jones Electrical Distribution are satisfactory.The company is having steady growth in sales. The operating margins are also kept at optimal levels. However the company is facing problems managing their cash operations. A feel of cash crunch is guiding the firm to store more inventories, and as a result of that, the inventory levels have increased. The firm is also investing in fixed assets on regular stand. The firm is able to maintain the cost of goods sold to an optimal level since last few years. This has been the result of maintaining cordial relations with the suppliers.The firm is maintaining healthy liquidity ratios and growth ratios. However, the increase in days payable and inventory turnover is a bit of concern. horizontal if the cash conversion cycle is reducing, we can sustain that days payable has exceeded the limit of 30 days. It means that if the relationship between the firm and supplier is not maintained, the firm can face the interest expenses for not managing their current assets. The firm is working on very thin operating margin. The increase in TIE (Times interest earned) over the years mea authorizedrs that the operation income is declining and shortly the firm give not be able to meet their annual interest costs. suggest of increasing sales volume on immediate basis to maintain profitableness. The firm is also able to maintain retention rate of 100% after providing for the proprietors salary. This made sure that the firm will take minimal finances from outside sources.The major problem for Jones Electric Distribution Company is to manage cash for the new financial year 2007. And this problem looks like a temporary problem. The firm is having stored huge inventories in expectation of sales growth for the New Year. The forecasted analysis sho ws that a onetime credit sweetening from bank will help the firm to manage their finances better. A higher credit will help the firm procure inventory and use them in business. With improved collections and cash at hand, the firm can now manage for make out discounts and save money. Secondly, the firm will be able to refrain a huge sum of $201,000 at the end of FY 2007. These funds can be used to retire their personal loan with Mr. Varden. Retirement of this loan will help the firm to improve on its profitability and the bank finance will be easier.It is also observed that additional finance from bank is fate the firm to avail trade discounts. The nominal cost of not taking the discount when credit terms are 2/10, net 30 is 37.24 % ( 2/98)*(365/30-10), which is much higher than the 8% interest charged by the bank. Hence, it is advisable for Mr. Jones to go for a bank finance and use the money for availing trade discounts.Even if Mr. Jones adopt a slow growth strategy (to grow at the rate of 8-10%), and can manage with the existing facility of USD 250000/-, he can avail trade discounts and increase his earnings. However, one time use of bank finance will make sure that in coming years, Mr. Jones can be debt isolated and his firms financial performance will improve.Looking at the market growth and the risk appetite for Mr. Jones, we can advice him for taking an aggressive passage and avail higher finances from Southern Bank and Trust.The financial projections are given below for various options.Following are the options available to Mr. Jones.Take flip Discount and avail USD 350000/-Take Trade Discount and avail USD 250000/-Forgo Trade Discount and avail USD 350000/-Forgo Trade Discount and No redundant FinancingWe already seen that forgoing trade discount is a costly affair for the firm and hence cannot be used. So first two options are available for making a profitable decision. As Mr. Jones is forecasting the market as growing, he can use this opportu nity to avail bank finance at USD 350000/-. This facility can be availed in two parts, Long Term and Short Term. Long term funds of USD 100000/- can be used with the cash received from business to retire the personal loan. Remaining USD 250000/- can be used for normal business transactions and avail trade discounts. These operations will make sure that Mr. Jones is having stable business operations in under one year.While going for financial restructuring, Mr. Jones can also look forward to change the salary structure of Sales Personnel.FRICTO Analysis.Flexibility An additional finance of US $ 100000/- will help Mr. Jones to manage his afterlife cash flows. Mr. Jones is already maintaining a healthy RR of 100%. This helps the firm to keep the Debt/Equity ratio in control. The continuous operations will make sure that Mr. Jones can avail more finance as and when required.Risk Mr. Jones required reducing his number of suppliers and focusing on few major ones. With reduction of supp liers, it will be easier for him to manage accounts payable and he can demand better credit terms.Income Cost reduction will be the focus area for Mr. Jones, in an attempt to increase profits for the firm. As the firm is working on very thin margins, any excess spending will hamper the profitability of the firm. Mr. Jones needs to give closer look on operating expenses, which are increasing ahead of sales growth.Control Mr. Jones can decide on which option to choose for the betterment of the firm in long term.Timing As the business is in growing stage, Mr. Jones is able to take risks, depending on his relations with supplier and buyers. It is also beneficial to avail additional finance when business is growing.Others The risk appetite of Mr. Jones, his relation with the suppliers and an in depth knowledge of the industry is the key triumph factor for the firm. The success of the firm depends heavily on Mr. Jones insights.Exhibit IExhibit IIExhibit IIIExhibit IV