Reeds Case Study

Reed’s Clothier Case Study and Assignments

This case deals with the issues of Management of Working capital related to the Reed’s clothier. Reed’s clothier net sales have gone up but its profitability is inferior to the industry. The reasons can be attributed to the inefficient working capital management.

Reed’s Clothiers Selected Ratios:

Liquidity Ratios

Current ratio 2.7 2.02

Quick ratio 1.6 0.94

Receivables turnover 7.7 4.93

Average collection period 47.4 74.08

Efficiency Ratios

Total asset turnover 1.9 0.90

Inventory turnover 7.0 2.91

Payable turnover 15.1 6.97

Profitability Ratios

Gross profit margin 33.0 29.83%

Net profit margin 7.8 4.18%

Return on common equity 25.9 16.04%

The ratios listed above indicate that Reed’s receivables’ management is ineffective as its average collection period is higher than the industry. It also shows that asset utilization is inefficient as its asset turnover; inventory turnover is lower than the industry.

Holmes wants Reed’s to have an inventory reduction sale for faster rotation of inventory. This will help in improving the cash inflow of the organization and will improve the efficient management of inventory. Jim Reed had adopted a very loose working capital policy with higher current assets than industry averages. It can affect the sales in short term due to tight working capital policies. The type of accounts receivable control that I would suggest to Jim Reed would be separate accounts for customer categories. Such as: good, bad and marginal accounts, which would help different strategies for different categories of receivables. Reed’s cost for not taking the suppliers discounts is listed below. This will be calculated by the following formulae:

R= C*(365)/(D*(100-C))= 22.58%

C=CASH DISCOUNT= 3%

D= NO. OF EXTRA DAYS THAT CUSTOMER CAN USE SUPPLIERS'S FUNDS = 60-10= 50

R= ANNUAL INTEREST RATE FOR THE USE OF THESE FUNDS

Effective annual percentage= 22.58%...