Lawrence_Simulation_Fin561

Lawrence Sports Simulation Working Capital Policy Improving accounts receivable performance would be the first alternative to improve cash flow and working capital for LSG. Using different credit terms and policy can increase internal cash flow, working capital, decrease supplier payables, and the borrowing line of credit for operational cost. Also by implementing new credit terms and policy Mayo Store payments can be made in a timely manner. Diversifying LSG customer base would be the second alternative. The majority of total sales come from Mayo Stores instead of LSG. This puts Mayo Stores in a better position to pay payables to LSG at its discretion. By receiving minimum accounts payable payments to LSG supplier’s funds has to be borrowed to meet their basic requirements for the accounts payable. Adjusting the inventory policy to a Just-In-Time method would be the third alternative. This method would decrease LSG inventory carrying cost for inactive inventory. Risk Association Evaluation Contingencies When developing a contingency plan, you must first look at what is required to keep the financials where they need to be. The account receivables of LSG are not functioning where they should be and the credit line back-up plan is failing. The first contingency that should be implemented is when the supplier is late on payments; there should be additional consequence if payments are not received in time. LSG will have to be careful not to hurt the relationship with Mayo, but setting new guidelines will allow Mayo to understand they must make payments on time. If Mayo fails to make payments within the guidelines more than 2 consecutive terms, LSG will need to make it a requirement for full payment up front. Adding additional investors will help with the cash flow decrease. Allowing for a fund to protect the working capital of the company is important and will decrease the amount of money borrowed from the bank at a higher interest rate. As described above, a just-in-time method is one of the best contingency plans. This plan will allow for the merchandise to be delivered when it is needed. This would eliminate extra inventory space. This will decrease the monthly fees for a larger storage building. Developing a fall back method is essential to a business such as LSG. Having something to fall back on will prevent the company from failing. The additional investors should be strictly to increase the working capital. This will give LSG the extra funds needed when Mayo is late on payments. Performance Measurement Implementation of the new contingency plan will only be successful if they are able to measured in order to verify the level of effectiveness if any. Improving cash flow and working capital for LSG will be easily measured by evaluating and verifying the actual increase of available funds which will be noted on financial forms with improved financial reporting methods to the management team, relationships with the banks will be increased or operate at optimal levels, and will be monitored using a financial scorecard. Diversifying LSG's customer base will have to evaluate potential customers who will be able to comply with the new established credit and and accounts receivable policy. New contracts will be issued with new terms on a contingency basis to ensure they are able to meet the terms with no issue in order to provide more freedom and less dependency on utilizing one main customer base. The new customer base will also be added to the financial score in order to monitored for adherence. Finally, the use of the the new Just-In-Time inventory management system contains an automated performance management system that will provide up to date information on the inventory. Traditional cost accounting methods can be eliminated by the use of the JIT inventory system. “JIT system allow costs that have traditionally been classified as indirect to be directly tracked, allows the elimination of activities that do not add value, reduces the emphasis on variances of individual cost elements, and reduces the need for detailed reporting”(Johnson, Green, Amenkhienan, 1991). The use of the system alone will provide direct measurement and progress for LSG with minimal effort. Implementation Plan Working capital management is important to measure a company’s efficiency in operations and finance. The fundamental goal is to increase working capital ("Inc", 2012). Improving accounts receivable would benefit Lawrence Sports and improve their cash flow to positive. For this to occur Lawrence Sports has to maintain good working relationships with their vendors. Mayo Stores are the principle customer to Lawrence, contributing 95% of all sales. Lawrence gets about 70% of their raw materials from Gartner Products and Lawrence is the principle costumer for Murrays Leather Works, Lawrence contributes to 75% of their sales. Once Lawrence Sports has fewer outstanding account balances, they will have fewer write offs and her to borrow less form the bank. Mayo Stores will be have to adhere to new polices that will assure that agreed upon payment to Lawrence is timely and accurate. Management has to continuously make efforts to improve working capital with Mayo Stores. These efforts will yield greater efficiencies and overall customer service satisfaction as well. Lawrence Sports must be clear with Mayo Stores about payment methods and processing. Re-communicating all credit polices to Mayo Stores is the beginning to addressing credit management issues. More precise monitoring and motivating of internal and external techniques between Mayo and Lawrence ultimate creates better overall satisfaction for both parties. Implementation of this plan will create higher reimbursement for Lawrence Sports, elevate cash flow problems and decrease collection issues. References INC. (2012). Retrieved from http://www.inc.com/articles/2000/03/178.html Johnson, G., Green, F., & Amenkhienan, F. (n.d.). Performance measures and JIT: U.S. companies are revamping traditional cost systems. Product costing at Caterpillar. Publications - Abstracts. Retrieved August 12, 2012, from http://www.readabstracts.com/Business-general/Performance-measures-and-JIT-US-companies-are-revamping-traditional-cost-systems.html