Problem Solution: Lawrence Sports, Inc
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Problem Solution: Lawrence Sports Inc.
Lawrence Sports, a manufacturer of sports equipment, is having cash flow problems. On one hand it has obligations to pay its suppliers, but on the other hand it is expecting receivables from a customer that is unable to pay in a timely manner. On the surface, this may seem like a small problem, but in reality one has to ask, “how did this happen?” Obviously, cash outflows are exceeding cash inflows, but again, how could this happen in a structured, well-organized company?
Actually, cash flow is often a problem in big, successful companies. However, a lack of effective working capital management can cause these shortfalls to occur. In the case of Lawrence Sports, outflows exceed inflows and the shortfall is being made up by a credit line that is maxed out. Not only is the credit line maxed out, but it carries with it an interest that fluctuates depending on the amount borrowed. This is proving very costly to Lawrence.
Situation Analysis
Issue and Opportunity Identification
Lawrence Sports has a number of issues that need addressing. However, if the company is able to make positive changes toward better working capital management the company can enjoy growth and prosperity. Lawrence needs to look at working capital management as an opportunity to better serve its stakeholders and improve its current economic standing.
At the present time, Lawrence is not effectively controlling the inflow and outflow of cash. The company is being very accommodating when it comes to its sole customer Mayo. On the other hand, Lawrence is being pressed heavily by it suppliers. Suppliers are adhering to their prospective credit policies and expect prompt payment from Lawrence. The problem arises when Lawrence tries to pay for the supplies it needs to furnish the finished product from Mayo. Mayo has pushed back the payment date meaning that Lawrence will not have the cash available to pay its suppliers. Furthermore, the credit line that the company was relying on for a buffer has become maxed out and the company is subject to often high variable interest rates.
Lawrence Sports needs to step back and examine these issues and devise a better working capital management system. Working capital management is concerned with current assets and current liabilities. When dealing in the short-term, Lawrence is limited. The company does not seem to have a cash budget in place and management seems to have no clue as to the amount of capital that is needed to sustain the company for any period of time.
Looking into short-term financing, cash budgeting and a possible revamping of the credit policy are all viable solutions. However, there are a number of ways that Lawrence can accomplish these tasks. Narrowing the list of alternatives to include only those opportunities that produce the best results will be tricky.
Stakeholder Perspectives/Ethical Dilemmas
The stakeholders involved in this scenario are Lawrence Sports management, employees, the suppliers and Mayo. The management team has the dreaded task of keeping the company afloat from week to week. Up until this point the going has not been easy. Management has already delayed payment to Gartner, one of its key suppliers. There is a question as to whether delaying the payments to suppliers is ethical. After all, the supplier is extending credit based on a good, trusting business relationship. Taking advantage of this relationship could prove detrimental to the business relationship.
Employees are stakeholders in that jobs are on the line. In the hierarchy of Lawrence, one realizes that each department is dependent on another department. For example, the marketing department is dependent upon the product development department. Without a quality product, there would be no need to market. Therefore, the employee pool is intertwined with individuals that work together as a team and are dependent upon one another. Is it ethical for management to conduct business in such a manner as to jeopardize the livelihood of these individuals? Is it not the responsibility of management to make sure that effective cash management systems are in place as well as working capital management systems?
The specific characteristics of the suppliers are not clear, but what is known is that credit policies and payment arrangements have been agreed upon before any problem occurred at Lawrence Sports. These suppliers are in the business to make money and are expecting timely payment. Is it fair to hold back payments from the suppliers just because Lawrence has failed to make adequate capital management plans?
Finally, Mayo is a stakeholder with the best overall position. The company no doubt realizes that it is the bread and butter for Lawrence Sports. Since, Mayo is the sole customer of Lawrence; Mayo seems to have all the pull in the business relationship. As it stands, Lawrence is a little leery of upsetting Mayos management and is standoffish when it comes to making any changes to Lawrences dealings with Mayo. However, if Lawrence does decide to stand strong and create a tougher credit policy, what effect would that have on Mayo? Would the company be offended and pull out? If so, would that gesture, in a business world where everyone is out to make money, be ethical?
Problem Statement
The good news for Lawrence Sports and for all the stakeholders involved is that the issues described are fixable. The first step for the company is to identify the issues and recognize the opportunities that exist for the company. A good problem statement for Lawrence Sports is as follows: Lawrence Sports will meet short-term and long-term financial obligations through the development of effective working capital management, cash management and the revision of its present credit policy.
End-State Vision
By implementing an effective working capital management system, Lawrence Sports is providing for its future by taking care of the present. This means that the company has control over its working capital in such a way that the company can meet its current obligations without jeopardizing its livelihood. Furthermore, by taking a closer look at its principal assets, accounts receivable inventory, cash balances and marketable securities the company can begin to notice small changes that can make a big difference in the long run. For example, a careful credit analysis of a potential customer could lessen the uncollectible accounts receivable accounts and allow Lawrence to feel more comfortable extending credit to customers.
Lawrence could also learn many ways to