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 believed it would raise the capitol necessary to put Reed's back in black. Jim believes (and the figures back him up) that his sales increase when inventory increases. He does not want to decrease his inventory. I would suggest an improved inventory control system and a net 30 A/R.
Assuming that Reed's can improve its operations to be in line with the industry averages, I have constructed a