Case Study on Working Capital

Week 3

Individual Project

Reed’s Clothier, Inc.: Working Capital Policy

Jim Reed, II had just left a rather unpleasant meeting with his banker, Harold Holmes of First Virginia National Bank. Jim had banked with First Virginia for almost 30 years and his father, who had established Reed’s Clothier in 1934, had only banked with First Virginia. Holmes, however, had just informed Jim that the bank would not extend their line of credit any further. In addition, the overdue note payable for $130,000 must be paid within 30 days. Jim could not believe that Holmes had the temerity to tell him he needed to drastically reduce the store’s inventory and to strongly suggest an inventory reduction sale. Since its founding, Reed has only held the industry’s traditional semiannual sales-in January and July. Although Jim was piqued by this young bankers demand, the note was 45 days past due, and Jim did not know how he could make any more than a token payment on the note within the next 30 days.

Reed’s Clothier, a gentleman’s clothier has been in business since 1934. In 1976 the annual sales had grown to $800,000. In 1976, Reed’s occupied the first floor of a three-story building in the heart of downtown Lexington. Reed’s used the second floor of the building as the store’s office and warehouse. The third floor, with an outside entrance and elevator access, was rented to the law firm of Bundy, Hawk, and Harrington. In 1981, Jim decided to expand the retail floor space by refurbishing the second floor as a retail shop and using the third floor as a warehouse and office. The first floor was then also modernized and the store had a very contemporary look and an $880,000 long-term mortgage debt.

Mr. Reed had slowly increased the amount of inventory in the store with the belief that many sales were lost because an item was not in the store when a customer requested it. Sales did grow steadily each year, topping $2 million in 1994, which bolstered Mr. Reed’s belief...