Lawrence Sports Working Capital Policy
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Running Head: Lawrence Sports
Lawrence Sports Working Capital Policy Paper
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University of Phoenix
MBA/550 Resource Optimization
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Lawrence Sports Working Capital Policy Paper
Operating a business with a balance in capital management is essential to every business whether small or large. A constant vigil over how much money comes in and how much money goes out, as well how much money is tucked away must be maintained. A business could find itself at a production standstill or even bankruptcy because of a lack of cash. Lawrence Sports lacks capital working policies as well as broad selection of customers and suppliers.
Working Capital Policy
A vital tool in an effective capital working policy is cash budgeting. A cash budget is a way to monitor a businesses cash inflows and outflows, which in turn assist in predicting a companys ability to pay debt, expenses and can be used in planning short-term credit needs (Score, 2007). Lawrence Sports has a credit line with high interest rates. The company is in a constant state of worry in regards to paying off the loan without borrowing any more money. The impact is felt amongst the companys customers and suppliers. Lawrence Sports relies on on-time payments from the customer, stretched out payments to the suppliers and a credit line with high interest rates. The company appears to act more out of panic versus long termed planning that can help maintain control over the finances.
Lawrence Sports needs to monitor the time between cash inflows and cash outflows. For example: Since Lawrence Sports main cash source is from Mayo, Lawrence Sports needs to monitor how long it takes from the time materials are ordered for Mayo and how long it takes for Mayo to make the final payment. A cash budget would assist in showing when cash is needed to pay bills. If the bill is due before payment is received, then that could indicate a need for financing until payment is received. Lawrence Sports can then try to negotiate payment terms with customers and suppliers to strike a balance between the inflows and outflows and rely less on short-term financing to pay the bills until the final payment arrives. A relationship with the companys suppliers and the companys creditworthiness are put in jeopardy with too many late payments. Viewing a cash budget can help the leaders of Lawrence Sports view where the issues and opportunities are located and free up working capital.
Working capital comprises of current assets that have yet to be liquidated. The average firm has about 40 % of its working capital tied up in current assets (Maysami, 2007). The focal point of any good working capital policy is to free up cash so the cash can be used to further grow the business (Myers, 2006). Lawrence Sports working capital policy appears too casual. The company finances all shortages with the line of credit. The credit terms with Mayo is 20% collection upon ordering and 80% in the following week. The credit terms with Gartner (supplier) is 40% payment upon purchase and 60% the following week. The credit terms with Murray (supplier) is 15% payment upon purchase and 85% the following week. According to the simulation (2007), inventory is kept at a minimal because when Lawrence Sports had to replace a shipment, new parts were ordered to fill the replacement order. Lawrence Sports appear to have some agreements, but it appears as though they are not kept. At the risk of not upsetting the companys largest customer, the credit terms are probably relaxed often. In two weeks, 100% of the payment is due from Mayo. However, if Mayo does not pay, Lawrence Sports has a tough time paying the suppliers and will delay paying the bill. This is a vicious cycle that may have suppliers leave Lawrence Sports.
Lawrence Sports can try to negotiate a new payment strategy to help reduce such large payments in a short amount of time. Incentives for on-time payments can be an option to encourage Mayo to pay on time. Lawrence Sports can also seek cheaper short-term financing to use for cash reserves.
Lawrence Sports currently uses a line of credit as a cash reserve along with a maintained bank balance of $50,000. Operating cost alone is $100,000 a week and currently the line of credit is almost to the max. A few hard weeks and Lawrence Sports might go into bankruptcy. Its imperative the company maintain the line of credit in good standing as this is the companys cash reserve for now. Cash reserves are what a company needs when cash flow dips (Gray, 2006). Enough cash should be kept to finance operating expenses that must be paid, even if the company made no sales. In the simulation (2007), there are two weeks in which nothing is sold. This can be an indicator that the business experiences seasonal periods of slow business. Lawrence sports needs to be prepared. There are several methods that can be used to help reduce the companys need to dip into the cash reserves until absolutely needed. The company can cut overhead. Cutting something that is not pertinent to the business can save cash. Closer monitoring of inventory such as deleting items that are no longer selling can be a way to free up cash. Financing long-term assets instead of using cash for items such as machinery or computers can conserve cash by making smaller payments. Firmer credit collection policies can also reduce the cash conversion cycle. Credit Policy
A well-designed credit policy can help put consistency of payments in Lawrence Sports budget. It can also assist in attracting new customers if discounts are incentives for on-time payments. The newly formulated credit policy for Lawrence Sports will address credit terms, invoicing, collection policy and discounts.
Lawrence Sports Credit Policy
Credit Terms
20% payment at time of sale with the balance due in 14 days after delivery of goods.
A 2% discount for all orders paid within 7 days
A .10% surcharge will be charged on all late payments.
All new customers will be subject to a credit check
Invoices