Jones Electrical Distribution, owned by Nelson Jones who is also the president of the company, is looking for a new bank that would expand his line of credit to a maximum of $350,000. The company seems to be already experiencing growth with net sales in 2004 of $1,624,000 and increasing to $2,242,000 in 2006 which is about a 38% increase in 2 years. The increase in sales has resulted in a shortage of cash which means that Jones Electrical Distribution bust increase their borrowing from the bank due to increases in expenses. In 2007, Jones Electrical expects an increase in sales of about 20.4% which would bring net sales to $2,700,000. In anticipation of the increase in sales Jones is going to have to increase the company's line of credit in …show more content…
The company has a large excess of inventory and this cannot be good as the company's liquidity is decreasing which could be a problem in the future when having to pay back the bank. The company's quick ratio in 2007 was 0.71 and in the beginning of 2007 has decreased to 0.66, which could be a problem when it is time to pay back to its creditors. Ideally, the company should try to keep it at a ratio that is 1:1. Likewise, Jones Electrical Distributions inventory turnover is decreased by a substantial amount between 2006 and 2007. This means that the company is not effectively managing its inventory because they have too much inventory on hand when they could use that inventory as cash. In 2006 the company's inventory turnover ratio was 4.8 and then it decreased to 1.16 during the first quarter of 2007. What does this mean for Jones Electric Distribution? Well on average in 2006, it took 76.09 days for the company to turnover its inventory, but in 2007 it takes 315.99 days on average for Jones to turn its inventory over. Jones Electric Distribution is holding way too much inventory on hand which is hurting the liquidity of the company as well as the amount of cash the company has on …show more content…
Jones Electric Distribution should start thinking about becoming a public company where they are able to issue common stock in order to raise the much need funding for the anticipated growth in sales. By issuing common stock Jones Electric Distributions will reduce their dependence on relying on the bank to pay off expenses. This in turn, will increase the amount of cash the company has on hand and they will only have to simply pay dividends to the company's