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
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