...“Reed’s Clothier” Case Study and Questions University of Phoenix FIN/370 – Finance for Business DATE “Reed’s Clothier” Case Study and Questions Reed’s Clothier Case Study Analysis Jim Reed, II the owner of Reed’s Clothier, a men’s clothing establishment is facing financial difficulties. Established in 1934, by Jim Reed to cater to the numerous Virginia Military Institute (VMI) graduates, the business struggled for the first several years. By 1976, the business annual sales had grown to $800,000, where Jim Reed decided to retire and hand over the business to his son, Jim Reed II. In 1981, Jim decided to expand retail floor space and acquired an $880,000 long-term mortgage debt. During this time, Jim increased inventories with the belief that higher inventories led to higher sales. In 1994, the business had grown to more than $2 million in sales. The increased inventories, along with the acquired mortgage payments have seriously eroded Reed’s positive cash flow. During the last year, Reed had slowly increased his line of credit at the bank and failed to take advantage of cash discounts offered by suppliers. Now, many of Reed’s accounts are almost 40 days past due, causing suppliers to demand payment. Jim decided to visit his bank in order to further extend his line of credit by an additional $100,000. Harold Holmes of Fist Virginia National Bank has advised Reed that the bank will not extend their line of credit, and that Reed must repay an overdue note of $13,000...
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...Reed’s Clothier” Case Study and Questions Reed’s Clothier Case Study Analysis Jim Reed, II the owner of Reed’s Clothier, a men’s clothing establishment is facing financial difficulties. Established in 1934, by Jim Reed to cater to the numerous Virginia Military Institute (VMI) graduates, the business struggled for the first several years. By 1976, the business annual sales had grown to $800,000, where Jim Reed decided to retire and hand over the business to his son, Jim Reed II. In 1981, Jim decided to expand retail floor space and acquired an $880,000 long-term mortgage debt. During this time, Jim increased inventories with the belief that higher inventories led to higher sales. In 1994, the business had grown to more than $2 million in sales. The increased inventories, along with the acquired mortgage payments have seriously eroded Reed’s positive cash flow. During the last year, Reed had slowly increased his line of credit at the bank and failed to take advantage of cash discounts offered by suppliers. Now, many of Reed’s accounts are almost 40 days past due, causing suppliers to demand payment. Jim decided to visit his bank in order to further extend his line of credit by an additional $100,000. Harold Holmes of Fist Virginia National Bank has advised Reed that the bank will not extend their line of credit, and that Reed must repay an overdue note of $13,000 within 30 days. Holmes suggested the Reed seek assistance from a consultant in order to establish a better inventory...
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...Reed's Clothier Case Study Beverly Jaquez FIN/370 August 3, 2011 Mr. Curtis Henson Reed's Clothier Case Study Reed’s Clothier was founded in 1934 by Jim Reed. In 1976 the company was turned over to Jim’s son, Jim Reed II. Since then Jim has made several changes to the company from expanding the retail floor space, modernizing the store to give it a contemporary look. Jim increased the amount of inventory because he believed that sales were lost due to an item not being available that a customer wanted to buy. Because of this sales did increase but so did the inventory. The current situation is that Jim is in default with Reed’s suppliers who are demanding payment. If no payment is received, they will cease all deliveries. He is also over 45 days past due on the note payable with the bank. This prompted Jim to go to his bank of many years and request an increase in the line of credit by $100,000. Unfortunately, the bank will not extend the line of credit any further. His banker suggested that he hire a consultant, pay the overdue note payable within 30 days to continue the present line of credit, have an inventory reduction sale to reduce the inventory, and reduce accounts receivable by collecting on the past due accounts. Jim does not believe this is a good idea. He feels he will be reducing his sales and losing customers if he follows the banker’s suggestions. Ratios Reed’s current ratio is 2.02. The industry average is 2.7. This means that for every dollar...
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...ratios and compare Reed's results with industry averages. (Some industry averages are shown in Exhibit 4.) What do these ratios indicate? 2. Why does Holmes want Reed's to have an inventory reduction sale, and what does he think will be accomplished by it? 3. XXXXX XXXXX had adopted a very loose working capital policy with higher current assets than industry averages. If he merely tightens his working capital policy to the averages, should this affect his sales? 4. Assuming that Reed's can improve its operations to be in line with the industry averages, construct 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. 5. What type of inventory control system would you suggest to XXXXX XXXXX? 6. What type of accounts receivable control would you suggest to XXXXX XXXXX? 7. Is the increase in sales related to the increase in inventory? (See Exhibit 5.) 8. What is Reed's cost of not taking the suppliers' discounts? Reed's Clothier Case Study Introductory Case Summary Jim Reed II is facing a dilemma of negative cash flow due to his business being slow. Jim’s decision for an increase of inventory has brought on uncontrollable debts. He was in hopes of increasing his line of credit thru his bank, but is rejected due to delinquency in the payment history and owing the bank $130,000 which needs to be paid within 30 days. Jim Reed’s personal banker, Harold...
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... Jim Reed II is facing a dilemma of negative cash flow due to his business being slow. Jim’s decision for an increase of inventory has brought on uncontrollable debts. He was in hopes of increasing his line of credit thru his bank, but is rejected due to delinquency in the payment history and owing the bank $130,000 which needs to be paid within 30 days. Jim Reed’s personal banker, Harold Holmes, suggested rapid changes to the business, in order to regain control and pay off debts. Some of these changes include: hiring a consultant to overlook the financial situation and help manage Reed’s Clothier’s inventory system and reducing inventory and accounts receivables to the industry average. After going over the balance sheet, Holmes suggested a considerable reduction in accounts receivable since that was an area which can be controlled. Ratio Analysis and Interpretations 1. Calculate a few ratios and compare Reed's results with industry averages. (Some industry averages are shown in Exhibit 16.4.) What do these ratios indicate? Exhibit 16.4. Reed's Clothiers Selected Ratios* Liquidity Ratios Industry Current ratio 2.7 Quick ratio 1.6 Receivables turnover 7.7 Average collection period 47.4 Efficiency Ratios Total asset turnover 1.9 Inventory turnover 7.0 Payable turnover 15.1 Profitability Ratios Gross profit margin 33.0 Net profit margin 7.8 Return on common equity 25.9 Liquidity Ratios Reed Industry Current ratio...
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...Reed’s Clothier Case Study FIN/370 November 02, 2011 The Reed’s Clothier Case Study Reed Clothier Case is a family owned and operated business that was established in 1934. Jim Reed, who is the founder of the establishment, is going through some financial difficulties. The first Virginia National Bank would not extend their line of credit, they also notified Jim on an overdue payment of $130,000, which needed to be paid within a month. Reed had made a choice to safe the business, by taking the cash in reserves in the amount of $85,000 and cash inventory in the amount of $491,000. Reed was determined to meet the financial obligation of the business, so he decides to covert a portion of the inventory into cash. Financial ratio analysis will provide the financial standing of the past, present, and future of the company to determine the best way to restore financial standing within the business. Liquidity Ratio: Reeds Industry, Current Ratio (2.0 & 2.7), The current ratio tells whether Reed can pay back it short-term liabilities and provide a sense of how efficient the company is run. Reed ratio is greater than 1, by knowing this Reed will be able to pay back his short term goal. Receivables Turnover (6.4 & 7.7), The Receivables Turnover ratio is a way for Reed to measure to quantity their effectiveness in extending credit as well as collecting debts. Reeds ratio is below the average, so this indicate the company should re-assess its credit policies. ...
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...Reed’s Clothier is at the present time suffering from financial problems the owner Jim Reed is in fear of losing his business. The business has a bank note 45 day’s in arrears, Reed’s has a bank note of $130,000 that comes due in 30 days the company also has $85,000 in cash reserves, $491,000 in inventory, and $413,000 in accounts in accounts receivable that need to be collected. Reed’s Clothier has meet its financial obligations, and the company needs to convert inventory into cash. To determine the financial standings of the company, a financial analysis will have to be done if Reed’s Clothier is to find the best way to raise the funds needed to cover the bank note and save the business. Ratios are used to calculate the information from the financial statements, and figure debt, inventory, receivable terms, expenses, and the assets of the company. Comparing the industry standards on the two items will determine the inability to repay the debt to the funds that can be collected in accounts receivable. The collection period for the company is 74.1 days compared to the industry average of 47.4 days shows a problem in accounts receivable that disrupts cash flow. The payable turnover ratio is also an important ratio. The industry standard is 15.1; Reed’s Clothier has a ratio of 7.0. If Reed’s has an inventory reduction sale, they may allow the company to raise the necessary funds to repay bank, this would be one suggestion for Reed’s personal banker Holmes. Holmes believes...
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...Case 16 Reed’s Clothier Inc James Jackson University of Phoenix Finance for Business FIN 370 Mr. Arnold Harvey July 21, 2010 Case 16 Reed’s Clothier Inc Reed’s Clothiers was founded by Jim Reed in 1934 when Jim retired from the military. Over the years, the business grew, netting over $800,000 by 1976. Jim Reed then decided to retire and handed over the family business to his son, Jim Reed II. The younger Jim then decided to buy a building in a prime area in downtown Lexington, creating a 880,000 mortgage debt. As the years progressed, Reed’s Clothiers success grew along with their inventory stock. Because of the rapid growth in Reed’s Clothiers’ inventory, debt was incurred. As the debt grew out of control and accounts became past due, Jim decided to make a visit to the bank his family did business with. There he learned that he was over extended in his credit and that he now had more debt and past due accounts than he did cash flow. The banker suggested that Jim hire a specialist to help manage his inventory and to get the company back on track. It was then Jim knew Reed’s Clothiers was in financial trouble. Reed’s Clothiers Question 1. Calculate a few ratios and compare Reed’s results with industry averages. (Some industry averages are shown in Exhibit 4.) What do these ratios indicate? Ratio Reeds Industry Current (current assets/current liabilities) ...
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...“Reed’s Clothier” Case Study and Questions University of Phoenix DATE “Reed’s Clothier” Case Study and Questions Reed’s Clothier Case Study Analysis Jim Reed, II the owner of Reed’s Clothier, a men’s clothing establishment is facing financial difficulties. Established in 1934, by Jim Reed to cater to the numerous Virginia Military Institute (VMI) graduates, the business struggled for the first several years. By 1976, the business annual sales had grown to $800,000, where Jim Reed decided to retire and hand over the business to his son, Jim Reed II. In 1981, Jim decided to expand retail floor space and acquired an $880,000 long-term mortgage debt. During this time, Jim increased inventories with the belief that higher inventories led to higher sales. In 1994, the business had grown to more than $2 million in sales. The increased inventories, along with the acquired mortgage payments have seriously eroded Reed’s positive cash flow. During the last year, Reed had slowly increased his line of credit at the bank and failed to take advantage of cash discounts offered by suppliers. Now, many of Reed’s accounts are almost 40 days past due, causing suppliers to demand payment. Jim decided to visit his bank in order to further extend his line of credit by an additional $100,000. Harold Holmes of Fist Virginia National Bank has advised Reed that the bank will not extend their line of credit, and that Reed must repay an overdue note of $13,000 within 30 days. Holmes suggested...
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...Reed’s Clothier Case Study FIN370 Finance for Business STUDENT University of Phoenix INSTRUCTOR DATE Reed’s Clothier Case Reed’s Clothier Inc. has struggled financially for the past three years. Owner, Jim has requested to his banker Harold Holmes to extend the company’s credit line in order to pay a $130,000 note payable that is going to be due soon. Unfortunately, the banker refused to give any additional credit and recommended to reduce the store’s inventory through an inventory reduction sale. The banker also recommended bringing Clothier’s accounts receivable to the industry averages. Jim argued that that he was going through a temporary cash flow problem and an inventory reduction sale would have a negatively impact on the sales. The eight answers below will help to determine Reed’s Clothier financial health and if its owner, Jim, should follow the recommendation that were provided by his banker. Question #1 Calculate a few ratios and compare Reed’s results with industry average. What do these ratios indicate? Liquidity Ratios: Current Ratio = Current Assets = 1960 = 2.0 Current Liabilities 1030 Quick Ratio = Current Assets - Inventory = 921 - 491 = 0.9 Current Liabilities 457 Receivables Turnover = Sales = 2,035 = 4.9 Accounts Receivable 413 Average Collection Period = ___365 _____...
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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...
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...Reed's Clothier, Inc. Case Study L. S. Moore Finance 370 March 30th, 2011 Reed's Clothier, Inc. Case Study Reed’s Clothier, Inc. Working Capital Policy and the background information, followed by the current situation and the Summary. Questions 1 and 4 will have been answered in an excel spreadsheet. Exhibit 16.1 Reed’s Clothiers Income Statement (in 000’s) Common Size Reed’s Industry Net Sales $2,035 100% 100% Cost of Goods 1,428 70.2 67.0 Gross Profit $607 29.8 33.0 General &administrative expenses $374 18.4 18.2 Depreciation & amortization $32 1.6 0.9 Interest expense $63 3.1 1.2 Earnings before taxes $138 6.7 12.7 Income Taxes $53 2.6 4.9 Net Income $85 4.1% 7.8% (Exhibit 16.2) Reed’s Clothiers Balance Sheet (in 000’s) Common Size ...
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...Reeds Clothier is a clothing store that has been around since 1936. It was founded by Jim Reed an ex military man from VMI (Virginia Military Institute). The majority of his customers were from VMI and his banking officer was too. I believe that these cozy relationships might have been the cause of the financial distress that occurred in this case. Jim's banking officer was lenient, because he was a friend. Jim had adopted a loose working capital policy with higher current assets than industry averages. Jim's customers were slow to pay A/R because they were friends and Jim was afraid of losing their business if he pressed them too hard. His sales overall might suffer if he losses these customers. But on the other hand if they turn out to be very loyal customers who understand that Reed's new policies are normal practice for most businesses, they might get on board with the new policies. The problems started when a new mortgage was taken out to remodel the store. They lost the rent they were receiving from the tenants on the third floor and now they had more bill and interest to pay. Jim use to take the 3/10 discount from his suppliers and since he can't anymore he is paying too much. A 3 percent discount would be allowed if paid within 10 days. The bill would be due in full within 60 days. Annualized discount of 3 percent on a 60 day cycle would be 18 percent. 360/60 x 3%= 18%. The new banking officer Mr. Holmes wanted Reed's to have an inventory reduction sale because he...
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...Case 16: REED’S CLOTHIER, INC.: WORKING CAPITAL POLICY As Jim Reed slowly walked the two blocks between the bank and his store, he knew his business was in serious financial trouble once he talked to his new banker, Holmes. He knew that there was something that had to be done to regain control. He had everything going wrong from the inventory being too much to the accounts receivables not being paid on time which were causing him not to be able to raise the cash required to meet its financial obligations. The liquidity, efficiency, and profitability ratio issues in this case indicates that Reed's Clothier, Inc. should addressed them in groups in order to understand the problem that Jim Reed is facing within his company. Holmes wants Reed to have an inventory reduction sale because he feels that this will reduce Reed’s sales less than 5 percent annually which will help to pay off the debts owed by the company. If Jim merely tightens his working capital policy to the averages, it will not affect his sales. It will help to keep his customers paying when they are supposed to. Reed's cost of not taking the suppliers' discounts led to the suppliers demanding payment with the threat of ceasing deliveries until payment was made. If Jim Reed was to use the just-in-time inventory control program, it could lead to reductions in inventories and, consequently, an increase in the efficiency with which assets are utilized. Other things would remain the same, which could lead to...
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...FIN370 WK4 Q. Briefly summarize the case. In order to increase sales, Reeds Clothier concentrated on increasing inventory. They were afraid that lower inventory level will harm sales. Company renovated the stores and tripled the inventory. But sale did not increase as they expected. While they tripled the inventory, sales doubled only. This resulted in excess inventory. Money was stuck up in inventory. Instead of analyzing the problem and addressing the root cause, company considered it as cash problem and tried to solve the problem by having progressively larger line of credit. But increasing the line of credit could not solve the problem. When banks demanded payment, severity of the issue came to the attention of the owners of Reeds Clothier. Now they are trying to analyzing financial problem and finding solution. Q. Calculate a few ratios and compare Reed's results with industry averages. (Some industry averages are shown in Exhibit 4.) What do these ratios indicate? Answer: Formulae: Current Ratio = current assets/current liabilities Quick Ratio = (current assets-inventory)/current liabilities Gross Profit Margin = EBIDTA/sales Net Profit Margin = PAT/Sales Ratio Reeds Industry Current Ratio 2.0 2.7 Quick Ratio 0.94 1.6 Gross Profit Margin...
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