Reed Case Study

Reed’s Clothier Case Study.

Summary

The owner of Reed’s clothing store Jim Reed has been in business since 1934 it was passed down to Jim Reed II. Jim made a decision to expand his store since it was doing so well and was under the assumption that with higher inventory meant he would have higher sales. The expansion cost him $880,000 in debt. Jim is not taking advantage of cash discounts offered by suppliers and keeps extending and increasing his line of credit, now suppliers and account holders are demanding payment, so Jim went once more to the bank to ask for another increase in his credit by $100,00. The banker Harold Holmes said they could not increase the credit anymore and that Jim must pay his overdue note to continue his line of credit. Harold suggested to Jim that he seek assistance from a consultant that could help him establish a better inventory system and reduce his inventories and account receivables to the industry average.

1)

Reed's Industry

Liquidity Ratios

Current ratio 2.0 2.7

Quick ratio 0.9 1.6

Receivables turnover 4.9 7.7

Average collection period 74.1 47.4

Efficiency Ratios

Total asset turnover 1.3 1.9

Inventory turnover 2.9 7.0

Payable turnover 7.0 15.1

Profitability Ratios

Gross profit margin 29.8 33.0

Net profit margin 4.2 7.8

Return on common equity 16.0 25.9

Looking at the ratios above we see that Jim’s is not working on several levels. He has a high collection and very low turnover, this means he is making quite a lot less profits due to this. His liquidity is not good and he is not going to be able to pay off even small debts.

2)

If Jim has an inventory reduction sale it will bring in some quick cash, which will allow Jim to pay off the overdue note that Harold wants him to pay off to keep his line of credit. By having an inventory sale with lower prices with the amount of inventory he has he should be able to pay off that note quickly.

3)

Jim needs to find a good balance, if he...