Reeds Clothier Case Study

Reed’s Clothier Case Study

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FIN/370 – Finance for Business

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Reed’s Clothier Case Study

Reed’s Clothier was founded in 1934 in Virginia by Jim Reed after his military career. The first six years barely made enough to give Jim an income but sales grew each year. The business was turned over to Jim Reed II in 1976 and has been run by him since. In 1981 the building was remodeled and the retail space expanded. There was an $880,000 long term mortgage debt. Jim Reed II believed that sales were suffering because items were not in the store when customers requested them. He increased inventory levels which helped sales grow steadily each year. Sales had doubled over 10 years but inventory levels had tripled over the same time. Due to the renovations and increased inventory levels cash flow was seriously low. Jim has been forced to extend his lines of credit to keep the business alive. In the past Jim did not need to bring financial statements when requesting lines of credit. Now that a new loan officer was in the bank he was asked to being updated financial statements. It was suggested that Jim get help from a consultant who would help him get a better inventory system. In addition to the consultant, Jim also needed to pay the overdue note payable in 30 days. It was suggested that the inventories be reduced and accounts receivable be reduced to the industry averages. Jim didn’t believe reducing inventory levels would help. Reed finally realized he was in trouble and wanted to know what he needs to do.

1) Calculate a few ratios and compare Reed's results with industry averages. What do these ratios indicate?

Current Ratio = Current Assets/Current Liabilities

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Gross Profit Margin = EBIDTA / Sales

Net Profit...