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Reed Case Study

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Reed’s Clothier Inc. Working Capital Policy

The industry’s current ratio is higher than Reed’s Clothiers current ratio at 2.02. The current assets are greater than the current liabilities. If Reed’s Clothier had proper management then they should be able to pay the debts. Reed’s inventory turnover rate is much lower than the industry standards. The industry standard is 7.0 and Reed’s turnover rate was 2.02. This indicates that the inventory is not being sold at the rate it is purchased.

* Holmes wants Reed’s to have an inventory reduction sale to reduce his inventory. Holmes stated that through reducing Reed’s inventory, the sales would be reduced less than 5 percent annually through an inventory reduction sale. It is the only alternative to the cash flow problems that Reed’s is enduring. It would be the only way to raise the cash required to meet the financial obligations.

Jim Reed should tighten up his working capital to industry standards. Jim’s current assets are 16.3% over the industry averages. He was so fixated on the idea that he must have an excess of inventory to increase the sales. Although, the sales did increase according to the increase of inventory, he did not adjust the inventory according to the demands of the consumers. Reed over extended himself with the expansion and increase in inventory. Suppliers made threats to cease deliveries until payments were made. Jim Reed is in serious financial troubles because of the loose working capital policy.

The two major suggestions that I feel would improve Jim Reed’s situation is to improve the inventory control system and modify the accounts receivables control. The inventory needs to be reduced according to the customer demands. The Just-In-Time (JIT) inventory systems focus on shrinking inventory. JIT is an inventory control system that allows the purchase of inventory only when it meets

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