Jessica Nguyen ID# 11250750

MGMT2020 Managerial Finance

Dr. Bulent Aybar
January 9, 2017
Financial Health, Jones Electrical and Costco Reflection Essay
Costco
Standing out from competitors such as BJs, Sam's Club and other larger wholesale
retailers, Costco has been able to stand out from other retailers even though the basis of this
industry often involves consumers buying in bulk, membership and loyalty rewards as well as
other benefits. This kind of wholesaling industry offers a membership at often a one-time charge
that members pay and continually shop at through the duration of the membership. Through the
usage of memberships and loyalty rewards, Costco has successfully turned cash in to cash
rapidly usually averaging around 3.6 days to recycle cash.
Although products are bought and sold relatively cheaper than other competitors, for
every sale that is made, Costco still has a small profit margin. One would think that would stop
the business from growing and surviving however, the way that businesses like Costco are able
to stay in operation is because of volume. Everything Costco does as a company is in huge
volumes, for example, purchasing Product A in large volumes, selling Product A in large volumes
and introducing products to consumers selectively in large quantities. When customers shop at
Costco, they know that they are getting the lowest price compared to retailers which makes them
more likely to come back. and because the products that Costco buys are even cheaper than what
they are selling them for, they are making a narrow profit margin through almost what seems to
be instantaneous recyclable cash.
"In more recent years, Bj's had achieved sales and profit growth greater than Costco's.
BJ's customers visited its stores 12 times per year versus 9 times for Costco and SAM's. BJ's also
reported gross margins of 9.2%...(Tayan)," which was reported higher than Costco, resulting in
higher efficiency however sales were drastically lower than Costco's, $101 million and BJ's $55
million despite the higher rate of membership that is paid at Costco's. This can be explained
through the selectivity of the products as well as the loyalty of customers coming back to a
specific store because they have paid for a membership.
For manufacturers of certain products as well, Costco is the ideal retailer as they are more
likely to introduce the manufacturer's products in huge quantities at gigantic volumes to
consumers. Not only does Costco make a profit from selling the product as a third party, it also is
a vital lifeline for the product's manufacturer if the product is new and not many people know
about it. This mentality is what keeps Costco alive and customers coming back, which can be
seen in the activities ratio from the Costco Wholesale Corp lecture. Receivable managements and
the total asset turnover may deteriorate, however if the Inventory management and the time of
goods in inventory is stable, it shows that Costco can stable grow as a company.
Jones Electrical Distribution
In the Jones Electrical Distribution, rapid expansion for several years has called for the
financial assessment of the company to realistically estimate the funding needed for the growth
of the company as well as expansion or shrinkage of Nelson Jones' company, as he is at the point
where he has relied on discounts as well as supplier credits. The major questions that raised flags
to the condition of Jones Electrical supply were "Why does a business that has a profit of

$30,000 a year need a loan?, What drove the increase in Jones' A/R and Inventory Balances and
lastly, the estimate of a $250,000 line of credit for 2007 being accurate.
To stand out with competitors it is given that Jones' needs to offer competitive prices that
makes the company comparable to others that he is competing against, which means that
discounts are often not going to be present. However, Jones' needs to pursue direct sales
aggressively for consumers to value the products and services he is providing and also competing
directly with the competitors services and products.
Upon viewing the financial statements, there was a visible financial discrepency that is
alarming to anyone who is interested in Jones' Electrical Distribution. The two important notes
that one can see is 1. the use of credit and bank loans increase drastically during the last two
years of the financial statement in the year ended 2007 and 2. sales and net income have a slow
increase rate with little to no increase in the profit margin. Through this we can see that over time
the company is declining in efficiency and external financing needs were increased which
resulted in a longer collection period as well as a slower inventory turnover. This directly
correlates to the fact that the sales growth that is necessary for the funds invested and inventories
are not being made, which is the reason why Jones is purchasing on discounts and through
supplier credits.
Assessing Financial Health
It is important to assess a company's future financial health because there can be patterns
of spending, earning retention, task management and other strategies that can be concluded and
used to change the business to becoming more efficient and more profitable. Through the
assessment of financial health, it also allows management to see the areas of potential
improvement which can be improving efficiency, reducing costs and analyze company activities
in motion towards company goals.
The steps to assessing Financial health begin with firstly anaylzing the fundamentals of
the corporation financial system. This is where the company's goals, strategies and sales growth
are determined and allow for management to strategize what are the best actions to help the firm
grow financially and efficiently. Next the analyzed investments to support the Business Units and
strategies require careful attention to accounts receivables, payables, inventories, equipment, etc.
Anything that is used to carry out the products or services that are provided by the company.
After analysis of investment, it is important to assess the future profitability and competitive
performance of the company. It is important in this step to identify the competitors in the
company's industry as well as focusing on sel-financing growth in addition to monitoring the
debt that the company accumulates. It is not very positive to have a company grow rapidly
compared to competitors yet have debt grow substantially parallel to that as well because it
creates an unsustainable business model. The next step would be to assess the future external
financing needs. At this stage the company may be a bit more stable and needs to have external
financing due to rapid sales, rapid growth/expansion and this can also be due to a large
accumulation of company assets. To acquire external financing, the company also needs to
ensure access to the target sources of External financing. It is important for the company to
financially stand stably or else it would be hard to identify the correct allotment of external
financing. It is vital to know exactly where external financing should be spent to improve
efficiency and gross profit margins. The company needs to have a 3 to 5 year plan in which the
company potentially forecasts finances, potential growth and sales, allowing the company to
question whether it is achieving the strategic, financial and competitive goals that are set.

The last few steps of assessing a Company's future financial health include performing
stress test under scenarios of adversity and the formulation of current financing plans. The latter
is about how finances are currently being spent and recycled through the company, usually
calling into question if it is financially flexible enough in the present. If not, the firm's past
performance can be used to formulate a more efficient financing plan.