Lawrence Sports Problem Solution and Defense
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Problem Solution: Lawrence Sports Inc.
Lawrence Sports generates $20 million in yearly revenue by manufacturing and distributing sporting goods protective gear for team sports. The main issue with Lawrence is that they depend solely on world leading retailer Mayo for the bulk of their revenue and only have two sources for their materials. The problem begins when Mayo Stores decides not to pay on time leading to major cash flow problems downstream. This paper will look at Lawrence’s financial problem and create a working capital policy that will address their cash management needs for the longterm.
Situation Analysis
Issue and Opportunity Identification
Lawrence Sports’ principle customer, Mayo Stores, is having a difficult time paying for the products on time. The current payment arrangement is that Mayo will pay 20% on purchases and 80% the following week. Mayo depends principally on this revenue from Mayo and it finds itself not being able to live up to the agreements made to their agreements to both creditors and suppliers. The only viable option detailed in the scenario is borrowing from Central Bank. Their plan is to borrow a daily loan for any amount to keep the account minimum of $50,000. Lawrence has reached the maximum amount that can be borrowed, which is $1.2 million.
Lawrence cannot afford to keep using the bank to bail them out during the low peak times of cash conversion usually occurring in the last few weeks of March. Using Central Bank to finance their operations has negative consequences. First, Lawrence has to come up with $1.2 million at 16% interest to bring the total to $1,392,000 and they are capped out. As mentioned above, the reason for the bank borrowing is that the company has one major source of income and not enough capital to meet the needs of their cash outflow. Each week the company must maintain week ending revenues of $400,000 to complete the $20 million a year goal. Managing working capitol for Lawrence is not an easy task, the company now finds itself heavily in debt and must renegotiate with their suppliers. Unfortunately, for these suppliers Lawrence had to use the practice of “stretching out its payables” in order to meet corporate expense obligations causing possible relationship issues with their principal suppliers of their raw materials. How long will these vendors tolerate the practice of renegotiation when cash flows diminish? Lawrence has failed to develop a working capital policy and a cash budget to achieve their goal of becoming an industry leader. To accomplish this they must implement a strategic recovery plan and redefine their goals. The company must increase its customer base and improve their credit and collection policy along with wisely investing their cash. “Cash flow is affected by both the cash-inflow that comes from collections on accounts receivables and interest from investment activities; while cash outflow occurs when corporate expenses and liabilities are paid” (Brealey, et al., 2005, p. 848) . “Good cash management is the backbone to every well —run organization. Receivables and payables have direct impact on the bottom line of the company. Improvement of the bottom line is a process that involves managers negotiating with customers and suppliers to optimize the price terms and financing relationships (University of Phoenix, 2008).
The company does not have a good leadership team. They must reorganize and hire a finance expert that understands cash flows. Maxing out credit with the bank is not an effective method in managing a company. The new finance manager must renegotiate interest rates and develop an implementation plan to get this company back on its feet. They cannot continue to stretch payables because they will eventually run out of business partners.
Lawrence has many challenges to address; but opportunities always arise from challenges. Lawrence has the opportunity to increase revenues and market share by expanding their customer base. Lawrence needs to examine their current business and begin planning to reorganize. First, the company must expand its customer base and look into alternate sources of funding. Expanding their business and eliminating their dependence on the bank should be the first two priorities in their reorganization.
Stakeholder Perspectives/Ethical Dilemmas
The stakeholders in this scenario begin with the management at Lawrence Sports, their employees, suppliers, and their largest customer Mayo. The management team has been faced with the challenge of keeping the company out of bankruptcy. The company is barely surviving week to week and the circumstances do not seem to be getting better, in fact, they are getting worse. The company has already delayed payment to one supplier. Ethical questions begin to arise when the company employs “stretching out payables” strategy. The supplier is acting in good faith extending credit to preserve a trusting relationship. Continuing to stretch payables could put their relationship in jeopardy.
Employees are stakeholders because their jobs are on the line. Each employee and department depends upon each other for example; the sales department relies upon the marketing department to generate advertising and leads for their products. The company must manufacture a quality product otherwise there will be no sales and no need for a sales department. The lives of these individuals are intertwined amongst the various departments and business units of the company. If management cannot get a good working cash flow the employee’s livelihoods are in jeopardy. The company finds itself in an ethical dilemma because they are responsible for the management of the company and effective cash management policies should already be in place.
For the suppliers as mentioned above, is it ethical to hold back payments to a vendor because of poor management decisions and policies? Why should the vendor have to suffer because Lawrence did not plan properly? The suppliers ultimately want to make money and be successful too.
Finally, Mayo is pulling the strings and Lawrence is the puppet in this relationship. Mayo can dictate to Lawrence how they run their business and they cannot afford to upset Mayo since the bulk of all their revenue is tied to one customer. What would happen if Lawrence enacted tougher credit policies? Would Mayo find another stooge to fill the void? Is it ethical for Mayo to play this game with Lawrence? These are the questions that must be answered if Lawrence wants to maintain their business and become successful.
Problem Statement
Lawrence