1.) Jones Electrical Distribution sells electrical components and tools to general contractors and electricians. The products that we sell include controllers, breakers, signal devices and fuses and they are purchased from nearly 100 different suppliers. Jones customers use the products in the construction and repair of commercial and residential buildings. The company’s sales depend in many ways on the seasonality of its customers’ businesses which have their highest activity during the spring and summer when weather is most suitable for construction work. The market in which Jones competes is large and highly competitive; we have to face significant competition from national distributors. To be able to compete, we have built up sales volume by successfully competing on the price and using an aggressive direct sales force. In turn, to be able to compete on the price, we have to maintain tight control over operating expenses, including paying our sales force primarily on commission and keeping overhead to a minimum. In addition, as part of the company’s expense management effort, we have historically paid suppliers within 10 days of the invoice date in order to take full advantage of the 2% discounts the suppliers have offered for quick payments.
2.) According to the Balance sheet (see exhibit 1 for details), there is about a 5% decrease in cash balance from the years 2005-2006, which tells us that we would probably have difficulty paying off our suppliers on time. As a result, we would not be able to use the 2% discount provided by our manufacturers. For example, in the first quarter of 2007, we owe $203,000 to our suppliers. If we do not use our discount, we would not be able to save $1,353 =($203,000*2%) per month or $16,240 per year, which is not a good thing. We also can see that there is an increase in inventory from year to year, which tells us