Reed's Clothier

Reed’s Clothier, Inc. has had problems with cash flow. They thought that if they increased inventory then they could sell more and improve their cash flow. This did not work. They even renovated stores and tripled their inventory, but their sales only doubled. The only thing that happened is an increase in inventory, in fact, an excess of inventory. They have also increased their line of credit at the bank and it is spiraling out of control. Jim Reed wanted to increase his line of credit again to be able to pay the vendors, but was refused by the bank. He was given suggestions by the bank to be able to get his finances under control. These suggestions included getting a better inventory system and having an inventory reduction sale.

Jim reed needed to look at the average ratios over the industry and compare them with his own. First looking at the current ratio, which is current assets/current liabilities you see that Reed’s Clothier Inc. has a current ratio of 2.0 and the industries is 2.7. Reed’s is much lower than the industry average. This indicates that they are having a problem meeting short term debts. Looking at their quick ratio, which is (current assets-inventory)/current liabilities, Reed’s is 0.94 and the industry average is 1.6. Since we take inventory out of the equation you can see they are still much lower than the industry average. This shows that they have too much inventory and need to work on reducing it.

Looking at Reed’s gross margin profit (EBIDTA/sales) and net profit margin (PAT/sales) it shows that these are also well below industry averages. Reed’s gross profit margin is 29.8% and the industry average is 33% and Reed’s net profit margin is 4.2% and the industry average is 7.8%. These to figures show that they are not doing well financially. Since they have a huge inventory and not selling enough of it they are causing themselves to have a low profit margin.

The loan officer, Holmes, suggested that Reed’s have an inventory...