Reeds Clothier Essay

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Reed’s Clothier A Case Study Case Summary The well known and respected men’s clothing store, Reed’s Clothier, is facing a large catastrophe. The owner Jim Reed II has a difficult situation to overcome if he wants his business to see the next fiscal period. The factors affecting the business are as follows: * First Virginia National Bank (FVNB) * Will not be extending their line of credit any further * 30+ years of doing business with Reed’s Clothier * A 30-day deadline to pay off the $130,000 bank note owed to FVNB * A surplus of inventory worth $491,000 * This will need to be converted into cash somehow * Needs to use this to somehow pay off the bank note * Only $85,000 in cash reserves * Not enough to pay off his current, and potential, debts In addition to outlining the reasons for the company’s misfortune above, this analysis will also look at the various financial ratio’s to get a better understanding of how this happened, and how Jim Reed could potentially get his business out of this predicament. (1) The first step is factoring the different financial ratios and comparing them to the industry standards. Below is a breakdown of those ratios. One area that really stood out after comparing Reed’s Clothiers financial ratios to the averages of the industry is Jim’s preference of keeping a large inventory. It seems as if that alone is having a negative impact on his business. Reed’s inventory turnover ratio of 2.9 is exceptionally low when compared to the industry average of 7.0. Another major difference is in Reed’s quick ratio. This directly correlates with Jim’s inability to quickly turn any of his current assets (besides inventory) into cash. Problems can also been seen with Reed’s Clothiers receivables turnover and average collection period. With a receivables turnover ratio of 4.9, Reed

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