Financial Management Reed's Current Ratio Case Study

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This would have a positive impact on sales. Other moves to reduce working capital, such as tightening the receivables turn, would not affect sales at all.

4.

1995 Pro-Forma

Net Sales

1938

COGS

Gross Profit

SGA Exp

Dep

32

Interest

63

EBIT

Tax

65.376

Net Income

5. I would suggest that Reed control his inventory with computerized tracking using SKUs. He should know exactly what is inventory level is at all times. This would allow him to have sales when levels are too high, improving his inventory turnover.

6. Accounts receivable should be controlled with incentives. Jim can provide discounts for early payment that encourage customers to pay more quickly. Currently, payment should be reduced by about one month in order to achieve the industry average, and there is no reason why customers cannot pay within a month.

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Delinquent customers should be charged interest, as would happen if Reed had a store credit card. This would provide Reed with the ability to earn in interest what he would otherwise earn by reinvesting monies from slow-paying accounts.

7. An increase in sales does not necessarily mean an increase in inventory. An increase in sales with a corresponding higher inventory turnover would result in higher sales at the same inventory level on the balance sheet.

8. Reed's cost of not taking supplier discounts is that he is paying full price. His liabilities are higher….....

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