Jones Electrical Distribution

Jones Electrical Distribution

Dr. C. Bulent Aybar
Professor of International Finance

Context
• Jones Electrical Distribution has been expanding rapidly for the past several years.
• Increases in working capital requirements have significantly outrun the capacity of the company to generate funds from internal sources.
• The company has been forced to forgo taking discounts on accounts payable and to borrow in increasing amounts from its bank to maintain its expansion.
• Jones must decide whether to continue to expand and, if so, how to finance the growth.

© Dr. C. Bulent Aybar

Impact of Growth on Jones: Investment Requirements
– Inventories + Accounts Receivables
2004

2005

2006

$430

$509

$643

– Investment in inventory and A/R has been growing at a rate of
~22% . (current assets has grown at 18.4%) > Sales growth of
17.49% for the same period
– Fixed Assets

Net Fixed Assets

2004
$113

Acquisitions

2005
$103

2006
$118

$15

$50

– Growth in fixed assets is moderate!
© Dr. C. Bulent Aybar

Working Capital and Sales Growth
2004

2005

2006

WC/Sales

26.47%

26.54%

28.67%

FA/Sales

6.96%

5.37%

5.26%

Sales

$1,624

$1,916

$2,242

COGS

$1,304

$1,535

$1,818

A/R

$187

$231

$264

Inventory

$243

$278

$379

A/P

$36

$42

$120

ACP

42

44

43

5.37

5.53

4.80

DSI

68

66

76

APP

10

10

24

CCC

100

100

95

WCR

$381

$453

$509

23.47%

23.63%

22.70%

Inv.Turnover

WCR/Sales

What is the impact of slowing inventory turnover and collection period on Jones’s investment requirements?

?

WC Investment is Growing Faster than Sales! Accounts receivable
Sales
Change in accounts receivable as pct of sales

2004
$187

2006
$264

Change
$77.3

$1,624
11.51%

$2,242
11.78%

0.27%

12/31/06 Accounts Receivable at 12/31/04 pct of
Sales
Actual 12/31/06 Accounts Receivable
Accounts Receivable due to increased receivables as % of sales

Inventory
Sales
Change in Inventory as % of sales

$258.0
$264.1

$6.1

2004
$243

2006
$379

Change