Receivables turnover ratio
This ratio measures the rate at which cash flows into the company. It is calculated as sales/accounts receivables. In this case, Reed's receivables turnover ratio is 2035/413 = 4.9. Compared to the receivable turnover ratio of the industry, Reed's has a low ratio. This implies that the rate at which the store receives cash inflows is lower than that of the industry. For effective competitiveness, the store needs to increase its receivable turnover ratio to the level of the industry or above.
Average collection period: This period is taken for the store to collect cash on goods sold on credit. The average collection period of Reed's is given as 365/4.9 = 74.48. The industry's average collection period is 47.4. Again, the industry is performing better than the store. The high average collection period for reeds is one of the reasons for the poor credit and liquidity situation of the store. The store needs to reduce its average collection period.
Total assets turnover: is the ratio that shows the increase in assets. It is calculated as costs of sales/total assets. Reed's asset turnover is: 1428/1591 = 0.89. The comparison of this ratio with the industry's (1.9) shows that the store realizes a low increase in assets.
Inventory reduction sale
This is the sale that is undertaken by an organization to carry out a massive sale of its inventories at a slightly less price in order to raise enough capital for expansion or paying off of creditors. Reed's is p0erforming poorly. It is experiencing less revenue as compared to the available inventory in store. As the sales are low, creditors have threatened to stop supplying until they are paid. Conducting an inventory reduction sale will enable the store to clear its debts, pay its creditors without incurring more debts through loans form the bank.
Lose working capital policy
The store operates on a lose working capital that is characterized by higher current assets that the industry averages. In order to improve, the store needs to tighten its working capital policy in order to reduce its current assets to the industry averages. However, Jim fears that his sales will be affected and in turn reduce the ability of the store remaining current. It is true that the reduction of inventory of the store would reduce the sales of the store. However, the reduction would not be over 5% per annum implying that the reduction in sales would not be drastic as Jim thinks.
1995 income statement for Reed's Clothing Store
Net sales 1,938
Cost of goods sold 1,363
Gross profit 672.2
General & administrative expenses 369.9
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Depreciation & amortization 32
Interest expenses 24.3
Earning per share 261.6
Income taxes 99.9
Net income 161.7
The above pro forma statement shows the performance of the store after the store has reduced its inventory to the level of the industry. The performance of the store improves.
Inventory control system for Jim Reed
The inventory control system is the system that is responsible for maintaining information about the activities of an organization in order to ensure effective delivery of products to clients. The activities involve din inventory control include the sales, manufacturing, storage, ordering and reception of goods. The required accounts control system that is necessary for Reed's is the one that executes these functions in sequence. A good computerized inventor control system is necessary for Reed's Store. Computerized tracking system will help Reed's acting as a key component of business strategies aimed at increasing productivity and maintaining competitiveness.
Accounts control system
Reed's requires a comprehensive accounts control system. The maintained receivable accounts and other related subsidiary ledger accounts should be separated form the functions of establishing the charges to the receivables accounts and recording cash receipts and preparing the deposits. Moreover, it should be separated form the approval of any adjustments or write-off to any receivable accounts. The store should also establish an approval of write-off accounts determined to be bad debts and adjustments for other disputed amounts.
Increase in Inventory and sales
Basing on the exhibit 5, the increase in inventory leads to increase in sales. However, the increase in marginal and does not match the increase in inventory of the store. This implies that Jim should reduce the increase in inventories until the sales have increased to the inventory increment magnitude.
Reeds cost of not taking supplier's discounts
The cost of not taking suppliers' discounts by Reed's stores happened in the past year. The events happened when the store was increasing its inventory purchases and interest rates on mortgages were increasing. The effect to the store was that the liquidity capacity of the store was reduced. The store ended up increasing its credit at the bank. The cost of all this was the erosion the store's positive cash flow and the profits of the store.
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