Reeds wanted to establish better inventory systems. Therefore, he suggested reduction of inventories and account receivables to the industry averages. This would ensure that he raise the cash required to meets his financial obligation.
Jim had increased the amount of inventory in the store in pursuit of increasing the sales. This was through his belief that many of the sales in his premise were lost due to these items being out of stock. This was due to the sales that never grew steadily over the year reducing by $ 2 million in 1994 making him belief that increase in sales is directly proportion to increase in inventory. Through the increase in inventory, the sales had increased twice as much in ten years but at the same period, inventory had tripled.
However, through increase in purchase and increase in the interest of mortgage principal payment, reeds positive cash flow has seriously been eroded in the past three years. This prompts him bringing in Holmes in the business as a consultant to help him establish better inventory system. This is where Holmes suggested to him that he is supposed to reduce and account receivables to the industry averages.
Through mere reduction of working capital, policy will not affect his sales much though it will have an impact. The reason being, for the sales of the business to be affected, several other things are required to be changed. Some of these things include establishing of working capital policy and ensuring day-to-day control of cash, accruals and account payables. The business should ensure that they monitor the level of current assets and how they are financed to ensure that there is no abuse of capital invested.
Cash management is also required to ensure that the business always has cash to pay current bills and maintain safety stock. The business should not also rely on the sales of the stock to pay for they current loan. They should always have compensating balance for the same to ensure that they maintain the sales required.