Lawrence Sports Working Capital Policy
Essay Preview: Lawrence Sports Working Capital Policy
Report this essay
Running head: LAWRENCE SPORTS WORKING CAPITAL POLICY
Lawrence Sports Working Capital Policy Paper
Your Name
University of Phoenix
Lawrence Sports Working Capital Policy Paper
Lawrence Sports, also referred to as L.S. is a manufacturing and distribution company. L.S. makes and distributes equipment and protective gear for baseball, football, basketball, and volleyball. L.S. purchases its materials from Gartner Products and Murray Leather Works. L.S. also distributes 95% of its products to Mayo Stores and has revenues of $20 million. L.S.
recently hired a financial manager to help with the current capital management position. The basis of this paper is to examine Lawrence Sports current use of cash budgeting and to describe the weaknesses that exist in the working capital policies that is leading to the interruption of cash flow problems. Operating a business with a balance in capital management is essential to every business whether small or large. Maintaining constancy in cash flow operations is vital for the survival of the business. A business could find itself at a production standstill or even bankruptcy because of a lack of cash. The Lawrence Sports scenario in my opinion lack strategic capital working policies as well as broad selection of customers and suppliers. The following working capital strategies should be applied to the Lawrence Sports scenario:
Cash balance requirements including cash reserves needed for long term opportunities that may arise.
Credit policy that balances Lawrence Sports desire to minimize accounts receivable and maximize revenue.
Supplier negotiation strategy for terms of payment that balances the costs to Lawrence Sports and their cash requirements.
Short term financing strategy to ensure availability of an adequate line of credit while minimizing the cost of that credit.
Metrics that will be used to monitor performance against the policy.
(University of Phoenix, 2007)
Working Capital Policy
A vital tool in an effective capital working policy is cash budgeting. A cash budget is a way to monitor a businesss 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). “Cash flow comes from collections on accounts receivable. Most firms keep track of the average time it takes customers to pay their bills” (Brealey, Myers, & Allen, 2005 , p.849). Lawrence Sports has a credit line with high interest rates. The company is in a constant state of worrying in regard to paying off loans without borrowing any more money. The strongest impact has hit 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. L.S. is reacting out of a state of panic as oppose to researching long termed planning that can help maintain control over the finances. Lawrence Sports main cash source is from principle customer Mayo Stores. L.S. needs to monitor how long it takes from the time materials are ordered for Mayo Stores and how long it takes for Mayo Stores to make the final payment. Mayo Stores has promise to pay all outstanding invoices, but have not kept their promises. Therefore, L.S. has applied pressure to receive payment from Mayo. Planning the cash flow will reduce the burden on their future finance and forecasting options for Mayo to make payments. ” Companies frequently sell goods on credit, so that it may be weeks or even months before the company is paid. These unpaid bills are shown in the accounts as receivables” (Beraley, Myers, & Allen, 2005, p.813).
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. Lawrence Sports working capital policy appears too contradicting . 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 currently uses a line of credit as a cash reserve along with a maintained bank balance of $50,000. Operating cost is $100,000 a week and currently the line of credit is almost to the maximum of $1.2 million. If payment from Mayo isnt rendered, within a few weeks Lawrence Sports could possibly go into bankruptcy. Its imperative the company maintain the line of credit in good standing as this is the companys cash reserve for now. Enough cash should be kept to finance operating expenses that must be paid, even if the company made no sales. In the simulation (2007), it is noted two weeks in which nothing is sold. This can be an indicator that the business experiences seasonal periods of slow business. Lawrence Sports should be prepared for possible financial shifting that may occur. For example, several possible methods may be used to help reduce the companys need to borrow into the cash reserves. Reduction in overhead cost and closer inventory monitoring may be considered as only short term solutions. Firmer credit collection policies can also reduce the cash conversion cycle.
A well-designed credit policy will help establish consistency of payments within Lawrence Sports cash operating budget. It will also assist in attracting new customers if discounts are incentives for on-time payments.
Credit Policy
A new proposed credit policy for Lawrence Sports will address