7. Is the increase in sales related to the increase in inventory? (See Exhibit 5.)

C A S E 1 6 REED'S CLOT HIER IN C WORKING CAPITAL POLICY Jim Reed, II had just left a rather unpleasant meeting with his banker, Harold Holmes of First Virginia National Bank. Jim had banked with First Virginia for almost 30 years and his father, who had established Reed'sClothier in 1934, had only banked with First Virginia. Holmes, however, had just informed Jim that the bank would not extend their line of credit any further. In addition, the over- due note payable for $130,000 must be paid within 30 days. Jim could not be- lieve that Holmes had the temerity to tell him he needed to drastically reduce the store's inventory and to strongly suggest an inventory reduction sale. Since its founding, Reed has only held the industry's traditional semiannual sales in January and July. Although Jim was piqued by this young banker's demand, the note was over 45 days past due, and Jim did not know how he could make any more than a token payment on the note within the next 30 days. BACKGROUND Reed's Clothier was founded in 1934 by Jim Reed shortly after he had completed his military tour. He had hoped to make a career of the military but during the early 1930s the U.S. Army was reduced in size, and there seemed little chance that this trend would change in the near future. Jim Reed had loved the com- munity near his beloved military school, and he decided to open a men's cloth- ing shop that would cater to the numerous Virginia Military Institute (VMI) graduates who lived in and around Lexington, Virginia. During the first six years, the store barely made enough money to provide a living income for Jim and his family. But he could see that sales were growing each year and that his primary customer base of ex raduates as growing