Reed's Clothier, owned by Jim Reed, II, has been in operation since 1934 and caters to Virginia's military graduates who live around Lexington. The clothing store has continuously grown since it opened, but has been having financial trouble for the past year. Jim has been increasing his inventory; he believes he has lost sales because he did not have items when customers requested them. He just met with his banker, to increase his line of credit, and was informed that another increase would not be possible. He also found out that he has a note payable which is due within 30 days. His banker suggested that he should have an inventory reduction sale to reduce his inventory to the industry's average. Reed's Clothier is in serious financial distress and needs to regain control or the store may have to close forever.
Reed's Clothier's current ratio is below average, but the company's ratios in the other two areas are above the industrial average, according to Dun and Bradstreet's Key Business Ratios.
Current Inventory Return onRatio Turnover EquityReed's Clothier 2.7 7.0 25.9Industrial Average 3.1 4.6 9.1Harold Holmes, Reed's banker, suggested that he should have an inventory sale to reduce his inventory to the industry's average. Holmes thought that Reed's sales would be reduced by less than 5 percent annually and that Reed may not be able to earn the necessary funds to meet his business's financial obligations otherwise.
Tightening Reed's working capital policy would probably have a negative affect on his sales, but could be temporary because his customers will still be able to order any merchandise that is not in the store. In today's business market, there are a number of different ways to buy a product without the need to physically visit the store. His customers could...