Sheet1
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
Investing
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
Sheet2
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
Investing
Cu
ent Purchase PPE
Quick
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
87
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
Sheet1
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
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
Liabilities
Note Payable Short term 14.2
Cu
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
Ratios
Cu
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
ation.
Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call XXXXXXXXXX,
write Harvard Business Publishing, Boston, MA 02163, or go to http:
www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
T H O M A S R . P I P E R
J E F F R E Y D E V O L D 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
o
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
year.
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
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2 BRIEFCASES | HARVARD BUSINESS SCHOOL
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
HARVARD BUSINESS SCHOOL | BRIEFCASES 3
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