Jane Designs $($JD$)$ was opened $25$ years in Los Angeles ago by Jennifer Smith and Alicia Wells, who between them had over $25$ years of experience in garment manufacturing. The partnership initially blended very well. Smith, reserved and introspective, is extremely creative with a real flair for merchandising and trend spotting. Mainly as a result of her genius, the JD label is synonymous with quality and $"$in$"$ fashions. Wells, outgoing and forceful, has contributed important merchandising and marketing ideas, but has mainly assumed the duties of the firm's chief operating officer.

Smith has had little interest in the financial results of the company, much preferring to work on designing new fashions and the development of marketing strategies. A few months ago, however, she decided that she had better become more involved with the company's financials for two reasons. She is considering the sale of her $50$ percent as she is tired of the cash crunches that the firm has experienced in recent years. Periodically, the retailers JD deals with have encountered financial problems and have taken long to make their payments, which often caused a mad scramble for cash at JD$.$ And if Smith decides to sell, she knows that she is likely to be involved in some stressful negotiations surrounding the company's value. Though she would hire a consultant to aid her in any negotiations, she decides it is a good idea to educate herself about JD$\text{'}$s financials.

Another reason that Smith is interested in the firm's financials is so she can better judge the managerial competence of Wells. When JD was small Smith thought Wells did a fine job, but now she wonders whether Wells is capable of running a firm as large as JD$.$ Actually, if Smith were convinced that Wells is a competent manager, she would not consider selling out since she genuinely enjoys being an owner of an apparel firm. But she thinks the apparel industry will face even tougher times in the next few years, and wonders if Wells is talented enough to successfully meet these challenges.

BORROWING CONCERNS

Wells's personality is such that she makes virtually all major operating and financial decisions. An important example of this was her decision several years ago to retire all long$-$term debt, a move triggered by Wells's fear that JD$\text{'}$s risk was increasing. She cited the difficulties of seemingly rock$-$solid retailers like JC Penney and Calvin Klein to support her claim. Wells is also concerned that firms the size of JD have had difficulty maintaining stable bank relationships. Due to increasingly strict federal regulations, some banks have called in loans at the slightest technicality, and most are scrutinizing new business loans very carefully. Consequently Wells views bank debt financing as "unreliable" and thinks that loan officers are capable of wasting her time. Smith isn't sure what to make of these arguments, but she is concerned that the debt avoidance has significantly reduced JD$\text{'}$s financial flexibility because it means that all projects will have to be equity financed. In fact, over the past five years there have been no dividends because all earnings have been reinvested. And two years ago each of the partners had to contribute $$15,000$ of capital in order to meet the company's cash needs. Another infusion of capital may be necessary since the firm's present cash position is low by historical standards. More importantly, however, Smith feels that the company is not benefiting from the leverage effect of debt financing, and

Smith suspects that JD$\text{'}$s inventory is "excessive" and that "capital is unnecessarily tied up in inventory." Wells's position is that a large inventory is necessary to provide speedy delivery to customers. She argues that "our customers expect quick service and a large inventory helps us to provide it$."$

Smith is skeptical of her argument and wonders if there isn't a more efficient way of providing quicker service. She knows that a consultant recommended that JD "very seriously" consider building a state$-$of$-$the$-$art distribution center. The proposed facility would allow $JD$ to reduce inventory and also handle big orders from retailers such as Kmart and Wal$-$Mart. Wells rejected the suggestion arguing that the estimated $$5-$million to $$8-$million cost is excessive.

Smith also questions Wells's credit standards and collection procedures. Smith thinks that Wells has been quite generous in granting payment extensions to customers, and at one point nearly $40$ percent of the company's receivables were more than $90$ days overdue. Further, Wells would continue to accept and ship orders to these retailers even when it was clear that their ability to pay was marginal. Wells's position is that she doesn't want to lose sales and that the rough times these retailers face are only temporary.

Smith also wonders about the wisdom of passing up trade discou