Lawrence Sports Working Capital Paper

Lawrence Sports Working Capital Policy Paper

MBA550 January, 2008

University of Phoenix

Many companies today are faced with challenging decisions regarding ways to compete in the domestic and or international marketplace especially regarding a working capital policy. Consequently, in todayпÑ--Ð...s changing financial business environment, a company must maintain financial viability by adhering to the basics of a business strategy which is to be profitable and continually increase revenues for shareholders. A company by the name of Lawrence Sports is no exception to the challenging decisions on a working capital policy. Lawrence Sports is a manufacturing and distribution company. In the simulation, Lawrence Sports makes and distributes equipment and protective gear for baseball, volleyball, football and basketball. Lawrence Sports purchases materials from Gartner Products and Murray Leather Works. The company distributes 95% of the items produced to Mayo Stores. Lawrence Sports has revenue of $20 million along with a line of credit for $1.2 million. A financial manager was recently hired by Lawrence Sports to help with the current capital management challenges and opportunities. Lawrence Sports needs to develop a working capital policy, cash balance requirements, credit policy, supplier negotiation strategy, short-term financing, and measurable metrics to monitor performance against policy. The ultimate goal of a company is to create value for shareholders. In order to create this value, the company has to create a competitive advantage using the policies and strategies in this paper to enhance the working capital along with cash flow for business growth.

The first step in this process is to understand working capital management and creating a working capital policy. пÑ--Ð...Working capital management involves decisions with regard to levels of cash, receivables, and inventory. Too much working capital is costly, reducing profitability and return on capital.пÑ--Ð... (Gilbert & Reichert, 1995, p. 17) The opposite of too much working capital is too little which could be costly due to lost opportunities and or the company may have insufficient funds to pay bills on time. An essential instrument in an effective working capital policy is cash budgeting. A way to monitor a companyпÑ--Ð...s cash inflows and outflows is called cash budgeting which assist in determining the ability to pay debt, expenses and can be used in planning short-term credit needs. (Score, 2007) The cash flow for a company comes пÑ--Ð...from collections on accounts receivable. Most firms keep track of the average time it takes customers to pay bills.пÑ--Ð... (Brealey, Myers, & Allen, 2005, p. 849) Lawrence Sports does not have a good system that accurately monitors cash flow which has required the company to establish a $1.2 million dollar line of credit with a high interest rate. The company faces a balancing challenge of paying off loans while attempting to not borrow more money on the line of credit established with the bank. Lawrence Sports needs to research a long-term planning process that can help maintain control over the company finances. Mayo Stores is the source of the main cash flow for Lawrence Sports. The company needs to monitor the length of time from an initial order of materials to the final step of payment by Mayo Stores. This company, Mayo Stores is frequently not timely with payment and Lawrence Sports needs to change this practice since this is a primary customer. Therefore, Lawrence Sports has applied pressure to receive payment from Mayo in a timelier manner. This step along with planning the cash flow will reduce the burden on future finances and forecasting options for Mayo to make payments. пÑ--Ð...Companies frequently sell goods on credit, so that it may be weeks or even months before the company is paid. These unpaid bills are shown in the accounts as receivables.пÑ--Ð... (Brealey, Myers, & Allen, 2005 p. 814)

The core of a good working capital policy is to free up cash so the cash can be used for potentially further growth and or reduce debt for the company. Lawrence Sports currently finances all cash flow shortages with the $1.2 million dollar line of credit. The credit terms and policy with Gartner is 40% payment upon purchase and 60% the following week. The credit terms and policy with Murray is 15% payment upon purchase and 85 the next week. The credit terms and policy with Mayo Stores is 20% collection upon ordering and 80% in the next week which the company does not adhere. The company keeps inventory at a minimum. As illustrated above the company has attempted to establish policies with each vendor however, Lawrence Sports has not been consistent in the application of the policies. This is probably because of the fact that Lawrence Sports does not want to lose Mayo Stores as a primary customer since this is the largest customer so the credit terms are probably too relaxed. Mayo Stores realizes this consequently abusing the credit courtesy and goodwill. In the simulation, Mayo Stores needs to pay 100% of an outstanding bill. The problem is if Mayo does not pay the bill Lawrence Sports will have a difficult time paying the suppliers and will delay paying the company bills in a timely manner. Lawrence Sports viability relies on an ability to manage successfully receivables, payables and inventory consequently the current cycle with Mayo Stores and others must change. For example, several possible methods may be used to help reduce the companyпÑ--Ð...s need to borrow in to the cash reserves. The company can reduce overhead cost and improve supply chain inventory monitoring as a short-term solution while increasing cash reserves. Lawrence Sports must have a firmer credit collection policy that can reduce the cash conversion cycle. Another step is to have an industry best practices credit policy that will help establish consistency of payments within Lawrence Sports cash operating budget. The credit policy should offer an incentive or discount for bills paid on-time.

The new credit policy is to пÑ--Ð...include good cash flow to reduce and maintain debtor days; minimal bad debts; good customer service; clear management information and a robust risk management plan.пÑ--Ð... (Hill, Sartoris, & Ferguson, 1990, p. 563) The credit policy will minimize accounts receivable and maximize revenue. Lawrence Sports new credit policy will require 20% payment at the time of sale with the balance due within 10 business days after delivery of goods. The business day is a Monday through Friday week. Institute a one and one half percent discount for all orders paid within seven business days and a 25% surcharge will be charged on all late