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Reeds Clothier Case
Reed’s Clothier was hoping to get an extension on their current line of credit at First Virginia National Bank. The new consultant at the bank, Mr. Holmes, informed Jim Reed that his extension has been denied and Mr. Holmes suggests that Jim should reduce inventory through a reduction sale and try to reduce accounts receivable by collecting on accounts from customers that are past due. After leaving the bank Jim realizes that he needs to take a serious look at his financials so that he can determine how to pay his loans back and to make his company more financially stable.
1. The ratios in exhibit four shows that the industries current ratio is 2.7 and their quick ratio is 1.6 and their receivables turnover ratio is 7.7. Comparing these ratios to Reed’s which has a current ratio of 2.0, a quick ratio of 0.9, and a receivables turnover ratio of 4.8. Comparing the ratios to each other you can see that Reed’s has a bad economic efficiency as well as indications of high inventory which in turn produces a lower profit margin.
2. Holmes wants Reed’s to have an inventory reduction sale so that he can make some cash fast. By lowering his inventory he would be able to make enough cash to pay on his loan and at the same time he would be able to increase profit margins of the company.
3. If Jim tightens his working capital policies to the averages of the industry standards I would not think that this would affect his sales. By reducing inventory using price reduction, customer discounts, and other possible sales this should increase store sales and at the same time be able to lower inventory.
4. Assuming that Reeds can improve its operations to be in line with the industry averages, constructs a 1995 pro forma income statement. Assume that net sales will be reduced 5 percent to $1,938,000 but that depreciation and amortization will not change but remain at $32,000.
Reed Clothiers Income Statement