Problem Solution Lawerence Sports

Problem Solution: Lawrence Sports Inc.

Charles Baker

MBA / 550

Instructor: Donna J. Adams

Nov 21, 2006

Abstract

In an effort to maintain financial viability in today's environment, corporations are required to adhere to the basic fundamentals of economics. A company's primary objective is to consistently increase revenue for their shareholders. Lawrence Sports is a company that manufactures and distributes sports equipment and protective gear. Lawrence has a cash flow problem do to its largest customer, Mayo Stores not paying on time. In this paper we will look at Lawrence's financial problem and create a working capital policy for Lawrence Sports that address their cash management needs for the long term.

Problem Solution: Lawrence Sports Inc

Working capital refers to the cash a business requires for day-to-day operations, or more specifically, for financing the conversion of raw materials into finished goods, which a company sells for payment. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The importance of a well-rounded working capital cycle is crucial in today's business environment. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient abilities to satisfy both maturing short-term debt and upcoming operational expenses. Simply put, good management of working capital will generate cash, which will help improve profits and reduce risks (White Paper-Managing Working Capital, 2003).

Lawrence Sports is a manufacturing and distribution company of sporting goods. Currently, the company is facing several situations that offer opportunities as well as problems that need to be evaluated. First of all Lawrence Sports has a cash flow problem, whenever there is a deficit situation, money is borrowed from the bank to tide them over. Lawrence is basely robbing peter to pay Paul. If Lawrence continues to operate in this manner it will put a strain on their business partners or stakeholders. Lawrence made it through the week of March by borrowing from the bank and deferring payment to Gartner by one week. The outstanding loan and interest burden have also gone up; Lawrence needs a better plan to manage the cash flow in the future. In this paper we will take a closer look at Lawrence's dilemma and determine a viable solution that will increase cash flow so their will be out flow to pay debt and working capital to handle unforeseen circumstances.

Situation Analysis

Issue and Opportunity Identification

Lawrence Sports' principle customer, Mayo Stores, is having a difficult time paying for the products on time. The current payment arrangements are that Mayo will pay 20% on purchases and 80% the following week. Being that Mayo is the principle customer at 95%, L.S. is placed into a situation where they in turn can't pay its creditors on time. There is a plan B. Plan B is to have Central Bank do a daily loan for any amount to keep the account at $50, 000. The problem with this is that L.S. has reached the maximum amount that can be borrowed, which is $1.2 million.

Having the Central Bank loan comes with its down falls. To pay off the loan Lawrence has to come up with $1.2 million and 16% interest to bring the total to $1,392,000. The reason for the bank borrowing is that L.S. only has one major source of income and it is not enough to meet the needs of the out flows of cash. Each week L.S. needs to have ending revenues of $400,000 to maintain the $20 million a year. Working capitol management for L.S. is not an easy task. L.S. needs cash now and there are no ventures looked into at this point.

There are many issues that need to be address; and there are opportunities that can come from making some solution in an organization. Lawrence has the opportunity to increase revenues with other purchasers. L.S. can look at its current state and see that there are opportunities that need to be realized in making the minor changes in the way cash management is operated. Now would be a appropriate time to explore increasing the customer base of the company. In addition to the above, Lawrence could also look into alternate sources of funding for the company; which in turn will help to eliminate the dependence on the bank loans. Lawrence has the opportunity to expand the business and have more positive working capitol.

Stakeholder Perspectives/Ethical Dilemmas

There are many stakeholders in the scenario, for the purpose of this paper I am only going to concentrate on 3 of the stakeholders. Mayo, Gartner, and Murray are the stakeholders I will be concentrating on.

Mayo Stores look at this scenario as an opportunity for positive change. The management is one of the supporters to change the repayment terms to better fit the expansion of the company. The dilemma comes in when deciding whether to hold the payment to use it in other areas or pay Lawrence for the products purchased. Gartner views the situation as a small setback for Lawrence. Gartner wants to be paid on time every time. Finally, Murray is taking the same stance as Gartner, on time - every time. The customers have to look at how their money is being used to benefit themselves. At the current state the customer is being cheated out of smarter more efficient services and products. The stakeholders invested in Lawrence have some serious ethical dilemmas to examine. For example is it ethical to withhold payment from a client to use it in other areas; and is it ethical to not pay at all because you are not able do to bad investments or money management?

Ethics and business go together companies should try to strive for ethical excellences. All companies should operate with a moral standard; this should be a selling point. Lawrence obligation should be to the companies' owners and stockholders. The company should stay within the law and certain moral limits but outside that Lawrence should think of how to maximize profits for its stockholders and owners. From this point of view, improving cash flow by delaying payment to its vendor would not be immoral, never paying the company would.

Problem Statement

Lawrence Sports can find a way to make some significant changes in the manor that business is conducted and financed