Lawrence Sports Working Capital Policy Paper
Essay Preview: Lawrence Sports Working Capital Policy Paper
Report this essay
Lawrence Sports Working Capital Policy Paper
A business should always watch their cash outflow and inflow; as well how much money is put away must be maintained. It is important to operate a business with a balance in capital whether large or small. A business could find itself at a production standstill or even bankruptcy because of a lack of cash. Lawrence Sports lacks on capital working policies as well as a wide range of customers and suppliers.
Working Capital Policy
Cash budgeting is an important tool in an effective capital working policy. A cash budget is a way to monitor a business cash inflows and outflows, which in turn assist in forecasting a companys ability to pay debt, expenses and can help with planning short-term credit. Lawrence Sports is in a constant state of worry in regards to paying off the loan without borrowing any more money. LS suppliers and customers felt the impact the most. 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 impulse versus long-term planning that can help maintain control over the finances.
Lawrence Sports needs to monitor the time between cash inflows and 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 help LS 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 depend less on short-term financing to pay 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.
Lawrence Sports working capital policy appears too informal. The company finances all shortages with the line of credit. The credit term with Mayo is 20% collection upon ordering and 80% in the following week. The credit term with Gartner is 40% payment upon purchase and 60% the following week. The credit term with Murray is 15% payment upon purchase and 85% the following week. According to the simulation, inventory is kept at a minimum 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.
Currently, Lawrence Sports 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. If Lawrence Sports experience a few hard weeks; they might be force to go bankrupt. It is essential that companies 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, 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 because there are several ways that can be used to help reduce the companys need to dip into the cash reserves until is completely needed. The company can cut overhead and by cutting something that is not important 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 computers or machinery can save cash by making smaller payments. Firmer credit collection policies can also reduce the cash conversion cycle.
Credit Policy
A credit policy that is well-designed can help Lawrence Sports put consistency of payments on the budget. It can also assist in attracting new customers if discounts are incentives for on-time payments. The new formulated credit policy for Lawrence Sports will address credit terms, invoicing, collection policy and discounts.
Lawrence Sports Credit Policy
Credit terms
Lawrence Sports credit terms can be 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 and all new customers will be subject to a credit check
Invoices
At the time of shipping the goods, a copy of the invoice will arrive with the order.
The invoice for the order will be sent no later than 24 hours to the accounts payable person. Finally, a second invoice will be sent if payment is not received in 14 days.
Collection Policy
All efforts will be made to collect on pass due accounts and partial payments can be negotiated at the lost of the discount. All accounts will be suspended after 30 days of non-payment. Payment options such as electronic payment and pre-authorized checks will be accepted. Any past due accounts that go over 120 days, payments may be sent to collection agency.
The incentive provided for customers that pay early might attract new customers who appreciate a discount and provide incentive for existing customers to pay early or at least within the 14 days. The policy also leaves the door open for communication. To let the customer know there is room for negotiation and the company values the customers business. The credit check might scare away potential customers but at the same time it can prevent a high volume on collections for the company. The terms