Lawrence Sports Generic Benchmarking
Essay Preview: Lawrence Sports Generic Benchmarking
Report this essay
Lawrence Sports (Lawrence) “is a $20 million revenue company that manufactures and distributes equipment and protective gear for baseball, football, basketball and volleyball” (University of Phoenix, 2008). The newly-appointed financial manager must maintain an adequate net working capital and a minimal loan burden by “negotiating short-term payment and collection arrangements with business partners” (University of Phoenix, 2008). Lawrence can benchmark organizations to analyze issues such as working capital strategies for long-term opportunities, cash budgeting, cash flow analysis, best practices in working capital management, risks and opportunities in working capital strategies and ethical implications of working capital alternatives.
Working capital strategies to prepare for long-term opportunities
Analyzing a company’s cash inflows and outflows accurately is challenging. Lawrence must determine how to deal with its primary customer’s inability to uphold the terms of payment. Stretching payables and borrowing from the $1.2 million line of credit with Central Bank is not proving to be an optimal solution since the interest rate on the line of credit increases as the borrowing amount increases. Chief Financial Officer Stephanie Sanders’ objective is to keep the amount of borrowing and accompanying interest rate burden as low as possible (University of Phoenix, 2008).
Cisco and McDonald’s have diversified operations and investments that attribute to their long-term working capital succession. In addition, Cisco’s automated collections system has subtracted days out of its operating and cash cycles. The company’s decision to move idle cash funds into income-generating accounts illustrates its efficient cash management practices.
McDonald’s is reinvesting its capital continuously to ensure long-term goals are reached. Lawrence needs to acquire better cash management and collection of accounts receivable to minimize borrowing from Central Bank at increased interest rates and jeopardizing relationships with its business partners because of their inability to pay their bills on time.
The purpose of cash budgeting
“The cash budget is a primary tool of short-run financial planning. It allows the financial manager to identify short-term financial needs and opportunities” (Ross, Westerfield & Jaffe, 2005, p. 742). At Lawrence, cash budgeting is necessary to maintain a positive net working capital balance to avoid borrowing against the company’s line of credit with Central Bank. Lawrence can look to a company such as National Semiconductor Corporation (National) for larger-scale budgeting tactics if necessary.
In 1997, National announced the selling of a majority interest in its Fairchild Semiconductor business for $550 million (Fisher, 1997). The decision allowed National to focus on products “that commanded higher prices and generated higher profits” (Fisher, 1997). Although National’s budgeting move was on a larger-scale than Lawrence, both companies are looking at increasing cash inflow. Donald MacLeod, National’s chief financial officer, indicated that the decision would allow the company “to capitalize the cash flow one would have gotten from Fairchild. We need cash to make sure we can pursue the strategic imperative we set for ourselves” (Fisher, 1997).
Cash flow analysis
“Cash flow analysis is the study of the cycle of your business cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management. A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month. If the total unpaid purchases are greater than the total sales due, you will need to spend more cash than you receive in the next month, indicating a potential cash flow problem” (Ward, 2008).
For Lawrence to conduct the cash flow analysis needed to determine areas of improvement and have cash flow success like BELK and ORACLE, it needs to determine the sources and uses of cash on a monthly basis. This will identify where cash comes from and how the cash is used (Ross, Westerfield, & Jaffe, 2005). This also provides a larger-scale view so that the long-term debt and equity are more visible to determine the direction of the cash flow.
Best practices in working capital management
Lawrence needs effective tactics to retain a positive net working capital. Management can benchmark other organizations to adopt best practices in working capital management. Southwest Airlines (Southwest) serves as an example for effective working capital management in the airlines industry.
Southwest implemented a number of best practices to sustain a positive working capital in the airline industry. The company only purchases and flies Boeing 737 airplanes, lessening funds spent on service, maintenance and flight training on various types of aircrafts. Southwest does not offer in-flight meals and offers fares that continue to be some of the lowest in the industry. In 2005, Southwest reported revenues that made the company the sixth most successful airline in the industry, due in part to its low-cost, long-term fuel contracts it negotiated years prior (Isidore, 2005). More than 80% of Southwest’s fuel needs in 2005 were capped at a crude oil price of $26 per barrel — just over half of the market price for oil paid by the company’s competitors.
Prices for airline fuel were expected to rise in 2006. Southwest compensated with a slight increase in flight fares. Because of effective working capital management strategies, the airline could afford to increase prices, thereby increasing cash inflow, and remain competitive in the industry.
Risks and opportunities in working capital strategies
Managing working capital involves supervision of inventories, receivable and payable accounts, and cash. Evaluation of risks and opportunities will keep a business organized and aligned for business operations. Managing risk, insurance, contracts, swaps, and hedging are some approaches used to evaluate the risks and opportunities to best suit working capital. Summit Electric Company (Summit) has been able to commit and remain constant in the industry by realizing the company’s full potential and monitoring its working capital closely. Maintaining a proper cash flow will allow Summit to take advantage