Lawrence Sports Problem Solution
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Situation Analysis
Lawrence Sports is a manufacturing and distribution company of sporting goods. Currently, the company is facing several situations that offer opportunities as well as problems that need to be evaluated. First of all Lawrence Sports has a cash flow problem, whenever there is a deficit situation, money is borrowed from the bank to tide them over. Lawrence is basely robbing peter to pay Paul. If Lawrence continues to operate in this manner it will put a strain on their business partners or stakeholders. Lawrence made it through the week of March by borrowing from the bank and deferring payment to Gartner by one week. The outstanding loan and interest burden have also gone up; Lawrence needs a better plan to manage the cash flow. In this paper I will take a closer look at Lawrences dilemma and determine a viable solution that will increase cash inflow so their will be out flow to pay debt and working capital to handle unforeseen circumstances.
Issue and Opportunity Identification
Lawrence Sports principle customer, Mayo Stores, is having a difficult time paying for the products on time. The current payment arrangements are that Mayo will pay 20% on purchases and 80% the following week. Because Mayo is the principle customer at 95%, L.S. is placed into a situation where they in turn cannot pay its creditors on time. There is a plan B. Plan B is to have Central Bank do a daily loan for any amount to keep the account at $50,000. The problem with this is that L.S. has reached the maximum amount that can be borrowed, which is $1.2 million.
Having the Central Bank loan comes with its down falls. To pay off the loan Lawrence has to come up with $1.2 million and 16% interest to bring the total to $1,392,000. The reason for the bank borrowing is that L.S. only has one major source of income and it is not enough to meet the needs of the out flows of cash. Each week L.S. needs to have ending revenues of $400,000 to maintain the $20 million a year. Working capital management for L.S. is not an easy task. L.S. needs cash now and there are no ventures looked into at this point.
There are many issues that need to be address; and there are opportunities that can come from making some solution in an organization. Lawrence has the opportunity to increase revenues with other purchasers. L.S. can look at its current state and see that there are opportunities that need to be realized in making the minor changes in the way cash management is operated. Now would be an appropriate time to explore increasing the customer base of the company. In addition to the above, Lawrence could also look into alternate sources of funding for the company; which in turn will help to eliminate the dependence on the bank loans. Lawrence has the opportunity to expand the business and have more positive working capital.
Stakeholder Perspectives/Ethical Dilemmas
There are many stakeholders in the scenario, but the three main stakeholders are Mayo, Gartner, and Murray.
Mayo Stores look at this scenario as an opportunity for positive change. The management is one of the supporters to change the repayment terms to better fit the expansion of the company. The dilemma comes in when deciding whether to hold the payment to use it in other areas or pay Lawrence for the products purchased. Gartner views the situation as a small setback for Lawrence. Gartner wants to be paid on time every time. Finally, Murray is taking the same stance as Gartner, on time- every time. The customers have to look how their money is being used to benefit themselves. At the current state the customer is being cheated out of smarter more efficient services and products. The stakeholders invested in Lawrence have some serious ethical dilemmas to examine. For example, is it ethical to withhold payment from a client to use it in other areas; and is it ethical to not pay at all because they are not able to do bad investments or money management?
Ethics and business go together companies should try to strive for ethical excellences. All companies should operate with a moral standard; this should be a selling point. Lawrence obligation should be to the companies owners and stockholders. The company should stay within the law and certain moral limits but outside that Lawrence should think of how to maximize profits for its stakeholders and owners. From this point of view, improving cash flow by delaying payment to its vendor would not be immoral, never paying the company would.
Problem Statement
Lawrence Sports can find a way to make some significant changes in the manor that business is conducted and financed in order to sustain a viable position in the industry. Many of the critical decisions that business owners and senior management face can be categorized as investment opportunities. Managers and owners are frequently making decisions that shape their businesss future. “All business decisions requires some form of finance, in view of that fact the method of finance that is used by a particular firm defines their cost of capital which in turn affects the amount of investment they are able to make, it is obvious that the investment and finance decisions of the firm are inevitably linked” (Brewster, 1999. p. 238).
Finance can be raised internally and externally by a firm. The two main external sources of finance include equity the issuing of ordinary and preference shares, debt or short-term loans. A companys shareholder funds are an example of internal financing, but typically the prime source of internal funds for outflow purposes is the companys retained earnings. The relative costs of these funds may vary, depending on the prevailing market conditions. Therefore, the aim of management or business owners is to determine the most efficient mix of these funds in order to obtain the optimal capital structure with which to maintain working capital.
The first principle of a capital structure is to select a financing mix that minimizes the hurdle rate and matches the assets being financed. The significance of the cost of capital is that the value of a firm is equal can be seen a measurement of the value of a firm. The optimum capital structure is achieved when the cash flows to the company remain constant, and the cost of capital is minimized so that the value of the firm will maximized.
End-State Goals
The end-state goals for Lawrence are as follows: decrease the dependency of the Central Banks loans interest to 10%, increase profitability by 30% within 1 year, market products to three new companies to increase inflow of cash by 10%,