Lawrence Sports
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Abstract
Provides a business analysis of Whirlpool, the worlds leading manufacturer and marketer of major home appliances and Nike, Incorporated which is primarily engaged in the manufacture and distribution of footwear products. Focusing on their working capital strategies, cash budgeting, cash flow analysis, best practices in working capital in a given industry, evaluation of risks and opportunities, and ethical implications of competing working capital alternatives of these companies. In addition the research provides alternative solutions for Lawrence sports and generic benchmarking.
Introduction
The purpose of this paper is to identify best practices in the field of working capital strategies and to apply them to the Lawrence Sports scenario. The paper contains working capital strategies, cash budgeting, cash flow analysis, best practices in working capital management, evaluation of risks and opportunities, and ethical implications of competing working capital alternatives. This research will provide recommended policies to establish at Lawrence to avoid future cash flow disruptions.
Optimal Working Capital Strategies
Working capital management is the art of ensuring that an organization has enough cash to maintain ongoing operations, satisfy maturing short-term debt and handle emergency situations without maintaining too much cash resulting in inefficient use of capital (Working capital management, 2007). Sound working capital management strategy involves managing cash on hand, recovering cash from sales as quickly as possible and delaying cash payments.
Working Capital Strategies
Working Capital, the companys cash cycle, is a big part of its earnings value.
The quicker a company can turn over their inventory, the greater the operation cash flow will be due to faster collections of their account receivables and/or the ability to stretch out payables. Changes in the current credit policy could help in Lawrences cash flow problems. Determining whether or not to extend credit is not an issue since Mayo is ninety-five percent (95%) of Lawrences customer base. A severance of the relationship would be detrimental to the survival of Lawrence. As a result, the bargaining power of Lawrence
is significantly lower.
The issues at stake include Lawrences dependency on accounts receivable payments, used to fund outstanding account payables. Their cash depletion results in one major factor, collection of receivables. The amount of credit provided to Mayo leaves Lawrence vulnerable and continuously having to draw on its line of credit in order to ensure continual delivery of raw materials from their vendors. Lawrence Sports has the opportunity to become a bigger player in the sporting goods industry by establishing new financial policies.
Cash discounts could be an option, both with Lawrences accounts payables and receivables. The current timeframe for payment is currently fairly short and would need to be given on delivery if full payment was received. An alternative idea is to offer 2/10, net 30. This meaning the payee may deduct two percent from the total bill if paid in ten day; otherwise full amount within 30 days. This alternative would offer Lawrence a greater opportunity to pay its suppliers in a timely manner, possibly capitalizing on discounts, and to avoid having to draw on its line of credit. These discounts could lead to increased orders.
Cash Budgeting
The main purpose for cash budgeting is to give the financial manager the tools needed to make decisions on short-term financing and to seize opportunities of potential investments. Cash budgeting will also help identify cash-flow gaps that may occur, giving the financial manager the opportunity to borrow in order to close that financial gap. Cash budgeting involves three factors: cash inflow, such as accounts receivable and investment income; cash outflow, such as operating costs, wages, overhead and accounts payable and cash on hand.
Nikes financial record demonstrates various capital management styles over the past ten years. Nike increased long-term debt from 2002 through 2005 to fund capital works projects of investment into their total assets and beginning short-term investments. As a result of their investment, Nikes financial ratios increased to 23.3% for return on equity and 14.9% for return on assets. Their current ratio is 3.3; so it is certain that Nike has the ability to generate cash if a strategic opportunity appears.
Cash Flow Analysis
Lawrences cash flow plan is to maintain a cash balance of at least $50,000 while collecting accounts receivables, covering their operating costs, accounts payables and expenses on investment activities. The problem occurs when Lawrence is not able to collect from its principle customer, Mayo. Mayo contributes 95% of Lawrences total sales. This poses an issue because Lawrence is dependent on Mayos purchases and this type of situation reduces any leverage Lawrence has in determining a credit policy and payment terms with its customers. The current cash flow plan is dependent of Mayo making regular purchases. There are some periods of time when Mayo goes weeks without making an order. This delays cash inflow and hurts Lawrence when it comes to paying their suppliers of raw material needed to fill potential orders Lawrence is projecting. Without a steady source of cash coming in, paying vendors is becoming an increasing problem for Lawrence and is requiring a draw on a line of credit that is costing Lawrence a high rate of interest expense for the short-term borrowing.
Best Practices in Working Capital Management
With over $18 billion in annual revenues, Whirlpool is the worlds leading manufacturer and marketer of major home appliances in more than 170 countries. As the market for home appliances matured, Whirlpool looked for strategies to maintain profit margins while strengthening long-term market position. Whirlpool hired IBM to integrate a finance and procurement software platform, and shift to an on-demand manufacturing strategy (IBM, 2005). From 2003-2006, Whirlpool has experienced a 4.5% gain in net income, an 18% gain in Net Cash Flow and a 77.5% increase in Working Capital.
Whirlpool started by “ranking” its business segments by priority according to which segments provided the greatest competitive