Case Study - “Jones Electrical”
2. – Why this profitable company needs a bank loan?
As we can see from the figures and the information given in the present case, the company is very profitable due to the ambition and well management done by its owner Mr. Jones. In this regard, we can see in “Table 2 in the spreadsheet”, that the company is taking advantage of the 2% discount offered by suppliers saving around $75,000.00 per year. We have to pay especial attention to the agreement reached with the former Co-owner of the company, Mr. Verden. This agreement is affecting the cash flow of the company since the interest expenses raises by around $12,000.00 more per year, this together the financial interest of the Metropolitan’s Bank loan makes that the company needs a larger amount to finance its debts, that by the way regarding the agreement with Verden should not being paid by the company but by Jones personal income since this agreement was not reached between the company and Verden but between Verden and Jones. Furthermore, we are assuming that the company is paying this agreement since the Metropolitan’s interest rate if not will be of 12,45% per year which it seems to be very high for a bank of this kind. See Table 3 On the other hand, we have see that other and perhaps the most important factor making the company running out of cash is the fact that Jones uses to pay the invoices within 10 days so he can take advantage of the 2% discount instead of waiting the net payment due in 30 days while his accounts receivables are paid in average every 42 days. It is not necessary to explain what paying around hundred suppliers every 10 days represent to cash flows if the company is receiving payments every 42 days, this means that the company pays 4 times at 1 time receiving. This is, for sure, the main reason why the company is losing liquidity and need to borrow money to banks. See Table 5. Furthermore, we can see that the average rotation on accounts payables is...
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