...Case 16: REED’S CLOTHIER, INC.: WORKING CAPITAL POLICY As Jim Reed slowly walked the two blocks between the bank and his store, he knew his business was in serious financial trouble once he talked to his new banker, Holmes. He knew that there was something that had to be done to regain control. He had everything going wrong from the inventory being too much to the accounts receivables not being paid on time which were causing him not to be able to raise the cash required to meet its financial obligations. The liquidity, efficiency, and profitability ratio issues in this case indicates that Reed's Clothier, Inc. should addressed them in groups in order to understand the problem that Jim Reed is facing within his company. Holmes wants Reed to have an inventory reduction sale because he feels that this will reduce Reed’s sales less than 5 percent annually which will help to pay off the debts owed by the company. If Jim merely tightens his working capital policy to the averages, it will not affect his sales. It will help to keep his customers paying when they are supposed to. Reed's cost of not taking the suppliers' discounts led to the suppliers demanding payment with the threat of ceasing deliveries until payment was made. If Jim Reed was to use the just-in-time inventory control program, it could lead to reductions in inventories and, consequently, an increase in the efficiency with which assets are utilized. Other things would remain the same, which could lead to...
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...Reeds Clothier is a clothing store that has been around since 1936. It was founded by Jim Reed an ex military man from VMI (Virginia Military Institute). The majority of his customers were from VMI and his banking officer was too. I believe that these cozy relationships might have been the cause of the financial distress that occurred in this case. Jim's banking officer was lenient, because he was a friend. Jim had adopted a loose working capital policy with higher current assets than industry averages. Jim's customers were slow to pay A/R because they were friends and Jim was afraid of losing their business if he pressed them too hard. His sales overall might suffer if he losses these customers. But on the other hand if they turn out to be very loyal customers who understand that Reed's new policies are normal practice for most businesses, they might get on board with the new policies. The problems started when a new mortgage was taken out to remodel the store. They lost the rent they were receiving from the tenants on the third floor and now they had more bill and interest to pay. Jim use to take the 3/10 discount from his suppliers and since he can't anymore he is paying too much. A 3 percent discount would be allowed if paid within 10 days. The bill would be due in full within 60 days. Annualized discount of 3 percent on a 60 day cycle would be 18 percent. 360/60 x 3%= 18%. The new banking officer Mr. Holmes wanted Reed's to have an inventory reduction sale because he...
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