Lawrence Sports Working Capital Strategies Work Sheet

Working Capital Strategies Work sheet

MBA550

University of Phoenix

Working Capital Strategies Work sheet

Introduction

The global marketplace requires companies continuously to improve in order to remain competitive. One of the essential tools for improvement is the ability to establish optimal working capital strategies and practices. Working capital practices include the management and delicate balance of accounts receivables, accounts payables, inventory levels, sources of short term borrowing and cash flows. The working capital manager at Lawrence Sports finds the company in an intricate position following defaults and delays on receivables from the Mayo Stores that have directly affected their working capital practices, namely debt payment. The result for such delinquent behavior on the part of the May stores: a corresponding cash flow deficit forced on Lawrence Sports which has forced the company to take out large bank loans with high interest payments, loans which they are sometimes not able to pay in a timely manner. Some opportunities are available to Lawrence Sports that may aid in rectifying the current situation. The company can restructure the working capital policy to best meet cash budgeting issues. A useful aid in making these decisions can come from benchmarking other companies that have faced similar challenges. Analyze the previous experiences of companies like Amer Sports, California Axle, EMC Corporation, General Electric, Keep It Green Landscaping, Regions Bank, Serigo’s Pool and Spas and Volt Information Services; Incorporated can assist Lawrence Sports in making an educated decision.

Keep It Green Landscaping

Keep It Green Landscaping is a mid-size landscaping company based in Fairlawn, New Jersey and has been working actively in the landscape field since its establishment in April of 1981. The company offers grounds maintenance, landscape design/construction, water design, and lighting design. In addition, the company offers top soil and mulch sales and deliveries for commercial and residential customers. (Keep it Green, 2005). Dyle McGregor has owned and operated Keep It Green Landscaping for nearly 27 years and acknowledges the difficulty to manage cash flow and establish a working capital budget during times such as winter months when cash inflow is cut short. “Cash is king in professional landscaping and lawn service businesses and cash flow is critical.” (Berner, 2003). Therefore, during months when Keep It Green does not have much cash coming in, the company is able to get by based on strategies it uses throughout the year which includes managing its equipment assets and inventory levels.

MacGregor buys his big equipment from dealers he’s worked with for years because of the remarkable deals he receives. The company rents equipment such as backhoes, tampers and chippers because crew members do not use them enough to justify purchasing them. “Landscaping business can be small and undercapitalized and some businesses cannot afford to own equipment. Maintaining it can be a cash drain.” (Berner, 2003). By renting, the risk can be transferred to the rental company when the business has its peaks and valleys. Another way Keep It Green preserves cash flow is by obtaining inventory on a per need basis. This allows Keep It Green to maintain its inventory level and not have excess inventory during slower months.

Lawrence Sports can consider some of the strategies Keep It Green uses by following a just in time approach by producing goods to order…on a per need basis. By keeping inventory levels low, the company lowers its risk having excess goods that is not being sold. Therefore, when payments are slow or collections on accounts receivables from vendors, Lawrence Sports can manage to pay bills through the cash it saves from reducing production costs.

Sergio’s Pool and Spas

Sergio’s Pool and Spas is a small company based in South Bend, Indiana that offers pool construction and maintenance to residential and local business companies. During the cold months when pool construction and maintenance grind to a standstill, the company knew it had to find a way to boost business. “Managing cash flow is my No. 1 stress,” says Joe Sergio. “Employees are my second.” (Marullo, 1996). Recently, Sergio and his two partners his brother Tony and his brother-in-law Al ScottвЂ"hit upon a solution. They started First Response Construction, a business that repairs fire damage. “Pools are obviously seasonal,” says Sergio, “and most of the fires happen in winter months.” Together the businesses employ 50 people year-round. Some specialize in pool construction and maintenance, some work in fire-damage rehabilitation and some make up a “swing” force that works at each company. To keep track of cash balance Sergio uses a computer to generate weekly and monthly cash-flow projections. “When you talk about cash flow, you need to differentiate between growing and stable ones,” he explains. “Projecting cash flow is never easy, but with growth, you have to start doing things like projecting payroll as a percentage of sales instead of absolute dollars. Growth means having to hire new employees, buy new trucks and keep bigger inventories”, he continues. “You also end up with bigger receivables.” (Marullo, 1996).

To help with low cash flow balances, Sergio’s has established a line of credit with its bank. Sergio has also tried “sweep accounts” that periodically move excess cash out of the company’s checking account and invest it in a money-market or other funds that yield a higher return.

Lawrence Sports can also add to its working capital by investing in bank products such as Money Market Savings and Certificates of Deposits. In addition, the company can also benefit from what Sergio’s did by investing in other services available to its vendors. Sergio’s established another area of its business for the colder months when pool sales are extremely low. Lawrence Sports can look into production of sports equipment for winter months, such as Hockey and Skiing equipment, which will present an opportunity to reach new vendors