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David Trejo- Graded-Week 4-Case 16-graded

David Trejo- Graded-Week 4-Case 16-graded - Reeds Clothier...

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Reed’s Clothier 1 Reed’s Clothier Inc. – Working Capital Policy David Trejo December 21, 2009 FIN370/University of Phoenix Instructor: Niki Silver
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Reed’s Clothier 2 Reed’s Clothier Inc. – Working Capital Policy Reed’s Clothier was founded by Jim Reed in 1934 (Sulock & Dunkelberg, 1997, p. 98). The majority of Reed’s customers are graduates from Virginia Military Institute. By 1976, Reed’s annual sales grew to $800,00. The founder of Reed’s retired in 1976, and passed control of the company to Jim Reed II. Jim Reed II’s belief that lack of inventory was hurting his sales prompted him to increase Reed’s inventory. By 1994, Reed’s sales reached $2 million. The increase in inventory and payments for interest and principal on the mortgage had been taking away Reed’s positive cash flow for the past three years. To further worsen Reed’s current financial situation, the line of credit at the bank had been increased and Reed was no longer taking cash discounts with Reed’s suppliers. Reed’s was also in peril of having its suppliers cut their terms and even ceasing deliveries, due to increased past due levels. Due to the foreseeable financial issues, Jim Reed II went to his bank to request another $100,000 line of credit increase. It was at this point that Jim was introduced to his new Banker, Holmes. Instead of the usual “no problem, let’s increase your line of credit,” Holmes requested from Jim to bring an up-to-date set of financial statements to a scheduled meeting. During their first meeting, Holmes brought up the fact that Reed’s cash flow issues were in danger of placing the company into financial distress. Holmes’ further explained to Jim that he had to get the company back on a strong financial footing. Holmes also suggested that Jim seek that advice of a consultant in order to establish a stronger inventory system. Holmes set a condition for continuing Reed’s line of credit, and this was to pay the past due note payable in a 30 day timeframe. In order
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