Reed's Clothier

“Reed’s Clothier” Case Study and Questions

R. Survis

FIN/370

November 1, 2010

Dr. Russel Riggs

“Reed’s Clothier” Case Study and Questions

Analysis

The Reed’s Clothier store was established in 1934 by Jim Reed. The store caters to the Virginia Military Institute (VMI) graduates by offering men’s clothing. The store struggled for the first six years but by 1976 sales had grown to $800,000. At that time Jim Reed Sr. decided to retire and hand over the business to his son, Jim Reed II. Jim Reed II is a graduate of the Virginia Military Institute and has worked in the store since 1968 when he retired from the U.S. Army.

When Jim Reed II took over running the store, he decided to expand the store’s floor space by utilizing all three floors of the building. The expansion cost the company the rental income that was paid by a law firm for the third floor and it increased the mortgage note for the business to $880,000. Jim Reed II increased his inventories with the hopes that the increase would lead to higher sales and sales had grown to $2 million in 1994. Sales did double in the last 10 years but the inventory levels have tripled. These choices hurt the company’s positive cash flow. Jim Reed II has slowly increased his line of credit over the years but has failed to take advantage of some cash discounts that were offered by some of his suppliers. Quite a few of his accounts are now 40 days past due and suppliers are demanding payment.

Jim Reed II has approached his banker from First Virginia National Bank to request a $100,000 increase in his line of credit. In the past, Jim’s banker has been an old classmate from VMI but recently his classmate has been promoted and Jim now has a new banker. His new banker, Harold Holmes, has indicated to Jim Reed II that the line of credit will not be increased due to his cash flow problems and a $130,000 note that is due within the next 30 days.

Holmes has suggested to Jim Reed II...