Lawrence Problem Solution
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Problem Solution: Lawrence Sports Inc.
Today’s highly competitive market has created different opportunities for all companies to grow and to develop themselves. Lawrence Sports (LS) is a manufacturer and distributor of sporting equipment and protective gear. Mayo Stores, the world’s largest sporting goods retailer, is the primary customer of Lawrence Sports accounting for almost 95% of their sales. The primary suppliers to Lawrence Sports are Gartner Products and Murray Leather Works (University of Phoenix, 2008). Gartner Products supplies LS with approximately 70% of their raw materials and Murray Leather Works supplies the rest. In recent weeks, Mayo has defaulted on 80% of its outstanding payments and LS expects additional delays. Due to the cash flow issues this has created for LS, the company has been forced to negotiate payment deferrals to Gartner Products and Murray Leather Works because its outstanding loan and interest burden have increased. The nine step model includes describing the situation, framing the right problem, describing the end-state goals, identifying the alternatives, evaluating the alternatives, identifying and assessing the risks, making a decision, developing and implementing the solution, and evaluating the results. This paper will propose alternative solutions to LS financial issues regarding cash flow and to determine the optimal financial solution that maximizes current and future wealth of the company.
Situation Analysis
Issue and Opportunity Identification
Based on Lawrence Sports scenario the company is going through some issues relating with their cash flow. According to Ross, Westerfield, Jaffe (2005, p. 734), the operating cycle is the time interval between the arrival of inventory stock and the date when cash is collected from receivables. The cash cycle begins when cash is paid for materials and ends when cash is collected from receivables. The cash flow time line consists of an operating cycle and a cash cycle. The need for short-term financial decision-making is suggested by the gap between the cash inflows and cash outflows. This is related to the lengths of the operating cycle and the accounts payable period. This gap can be filled either by borrowing or by holding a liquidity reserve for marketable securities. 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 Simulation, 2008). Lawrence has lot of issues and opportunities to increase their cash flow, which are the following:
Issues:
Lawrence Sport needs to work to improve the company’s Cash inflow. Lawrence Sport, based on the simulation seems to have problem improving the cash inflow because of the relation between Mayo, Gartner, and Murray.
Lawrence Sport’s has a line of credit with Central Bank. Whenever exists a cash deficit, money is borrowed to maintain a minimum positive cash balance of $ 50,000.00.
Lawrence Sport has some critical credit with the Bank. The Bank is charging them a high interest rate
Lawrence collection system has not been successful and have created cash inflow issues
Lawrence interest rates and debts are considerably high
Opportunities
Lawrence will need to be more financially aggressive. Lawrence needs to increase company’s cash inflow. Cash Inflow: Is the money that the company will receive from their operating activities, financial activities, and investment activities. A company that conducts a very simple business buys raw materials for cash, processes them into finished goods, then sells these goods on credit (Brealey, Myers, Allen Ch. 31, pg. 848).
Lawrence needs to work on the rate of interest because is too high; depending on the amount of money that is borrowed the interest rate varies from 10% to 16%. Rate of Interest Short-term bank loans are often made at a fixed rate of interest, which is often quoted as a discount. For example, if the interest rate on a one-year loan is stated as a discount of 5 %, the borrower receives 100 – 5= $95 and undertakes to pay $100 at the end of the year. The return on such a loan is