Reeds Clothier

FIN/370

August 29, 2011

Rodney Nelsestuen

In 1934, the Reed Clothier’s was opened by Jim Reed because the military was downsizing. Because Jim was not a natural businessman, Jim found it difficult to run the business; especially in the first six years, but Jim had faith that he could make it grow. In 1976, he turned the business over to his son. The sales, at this point, had risen to $800,000 a year.
Jim’s son, Jim Reed II, was not effective with running the financial aspect of the business. By 1981, there was a large mortgage debt of $880,000. This is in addition to being behind 40 or more days behind on vendor payments. Because of this, the bank has refused to renew the line of credit; which is one of the most important sources for financing the business in order to meet its working capital requirements. To make matters worse, the financial ratios, utilization of assets, and inventory are below industrial average, and Reeds Clothier’s need to improve its financial position by utilizing their assets more effectively. If company can raise their profit margin by controlling expenses, the effect of low assets utilization would be minimized. It is important for the business to utilize its assets, increase its turnover, and recover receivables in time in order to remain in business. If Reeds can do this, the bank will feel more comfortable with increasing its line of credit. If company cannot raise the asset turnover by increasing sales, then they would need to reduce their inventory by selling it quickly; this could be done by having sales to generate cash as well as decrease the inventory. The bank would be more inclined to increase the line of credit if they are assured that the company will improve by applying these ideas.

1. Reed Ratios
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