Problem Solution: Lawrence Sports Inc.

Problem Solution: Lawrence Sports Inc.

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University of Phoenix

MBA 550

Resource Optimization

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August 9, 2007

Problem Solution: Lawrence Sports Inc.

Lawrence Sports is a $20 million revenue company that manufactures and distributes equipment and protective gear for baseball, football, basketball, and volleyball. With a world-leading retailer as its major customer and two companies as its material source. Lawrence Sports not only had an established credit policy of its own portrayed by the relationships with its vendors, but Lawrence's major example involving credit policy was the established line of credit at Central Bank. In order to maintain its corporate policy of having accessible minimum cash balance of $50K available, Lawrence had to utilize its line of credit at the bank. However Central's credit policy stated that Lawrence's established borrowing limit was $1.2 million.

Lawrence heavily relied upon the use of cash during the low peak times of cash conversion which usually occurred in late March. Due to unforeseen circumstances, Lawrence had to utilize the event of "stretching its payables" to its vendors during the last two weekly periods of March in order to meet other corporate expense obligations. At times when issues arrived with the vendors themselves, the cycle also affected Lawrence when caused the manufacturing company to adjust during the difficult time period. Lawrence especially had to utilize the concept of stretching its payables when the company maxed out its line of credit with the bank. (Simulation: Working Capital Management)

Lawrence experienced both positive and negative effects of accounts payable terms on their cash conversion cycle. When the cash flow was slow, Lawrence had to negotiate with its vendors to delay its accounts payable in order to generate the needed cash to operate. While maintaining vendor relations is an important aspect of business, one cannot always please its vendors when it comes to the survival of the business. Lawrence definitely experienced this concept when dealing with both Gartner Products and Murray Leather Works. (Simulation: Working Capital Management)

Given the events listed above, Lawrence Sports chose to utilize the assistance of a professional consulting firm to aid in revising its current working capital policy and implementing a cash budget to optimize working capital. Now that the detailed research has been completed, the consulting firm is prepared to offer the Problem Solution findings. Incorporated below are:

1. Situation Analysis

2. Stakeholder Perspectives and Ethical Dilemmas

3. Problem Statement

4. End State Vision

5. Alternative Solutions

6. Analysis of Alternative Solutions

7. Risk Assessment & Mitigating Techniques

8. Optimal Solution

9. Implementation Plan

10. Evaluation of Results

Situation Analysis

Issue and Opportunity Identification

Lawrence Sport's finance team did not carefully identify Lawrence's business goals in terms of developing a working capital policy and a cash budget to optimize the working capital. Lawrence's goal was to become a predominant leader in its industry by increasing revenue and diversifying its financial asset portfolio. Lawrence still has a chance to achieve its goals if it defines and implements a stringent strategic recovery plan.

Lawrence Sports can develop intelligence on potential new business relations to improve its industry standing while increasing its customer base; improving its credit and collection policy; and wisely investing idle cash. Cash-flow is affected by both the cash-inflow "that comes from collections on accounts receivables" and interest from investment activities; while cash-outflow occurs when corporate expenses and liabilities are paid. (Brealey, Myers, & Allen, 2005, p. 848)

"Good cash management is the backbone to every well-run organization. Receivables and payables have direct impact on the bottom line of the company. Improvement of the bottom line is a process that involves managers negotiating with customers and suppliers to optimize the price terms and financing relationships. (University of Phoenix, 2007).

Lawrence Sports was also faced with another issue. The leadership team did not implement premise control when developing their working capital management plan. The company has maxed out in terms of borrowing and the categorized interest rate needs to be refinanced. To initiate recovery, Lawrence Sports must revisit the implementation plan and initiate strategic controls. Lawrence must also find a way to refinance its bank loans or continue to stretch its payables in order to generate needed daily operating cash.

Strategic controls are necessary to steer the firm through these events. They must provide the basis for adapting the firm's strategic actions and directions in response to these developments and changes. The four basic types of strategic control are (a) premise control (b) special alert control (c) strategic surveillance and (d) implementation control (Pearce and Robinson, 2004). While Lawrence Sports is continuing to delay its payments, sometimes called "stretching your payables", the company is in fact participating in a form of short-term financing. (Brealey, Myers, & Allen, 2005, p. 850) Lawrence should refinance this debt in order to generate needed daily operational cash.

Stakeholder Perspectives/Ethical Dilemmas

Several key stakeholders will be greatly affected by the implementation of a new working capital policy and cash budget management system. The main stakeholders of this implementation involve the executive team and the lead departmental managers. The executive team is pressured to produce profits for investors and to keep the business afloat while the departmental managers are challenged to generate necessary cash to operate daily business. A successful implementation of a revised working capital policy would greatly enhance Lawrence Sports chances