Jones Electrical Distribution
Jones Electrical Distribution sells electrical components and tools to general contractors and electricians. He purchases his products from almost 100 different suppliers. The sales depend on seasonality of it’s customer’s businesses, spring and summer being the busiest. The market for this type of business is very competitive and large and needs to be able to compete with increase sales volumes through reasonable pricing and a competitive sales force. To compete successfully it is necessary to maintain tight control over operating expenses, including keeping overhead to a minimum and paying the sales force primarily on commission.
The key issue in this case is the shortage of cash arising from the additional investments in working capital associated with the company’s increased sales volume. Jones Electrical needs a larger loan to increase sales and increase inventory. This way the company will be able to take advantage of the 2% purchase discounts that its manufacturers provide. With the increase in its line of credit it shows that the company has more sales, which results in more growth and a higher net income.
The bank needs to consider if he will be able to pay the loan back with interest. Also, what other debt he has, the future of the company, his relationship with his customers, and his financial skills in handling the business.
A company that has a profit of 30,000 per year needs to borrow so it can grow. With the extra cash Jones Electrical will be able to buy more inventories, increase sales, and take advantage of the 2% purchase discount.