Lawrence_Sports

Lawrence Sports Team Paper University of Phoenix January 12, 2010 Lawrence Sports Working capital management is the link between a company's “short-term assets and its short-term accountabilities” (Study Finance, 2010).The purpose of working capital management is to make sure that a company can maintain its daily “operations” and that it have enough capability to satisfy both growing short-term debt and future operating cost” (Study Finance, 2010). Working capital management includes “managing inventories, accounts receivable and payable, and cash” (Study Finance, 2010). Constantly, watching how much capital inflow and outflow, and funds are stored away must be maintained for a company’s success. Lawrence Sports is a manufacturer and distributor of sporting goods equipment and currently has revenues of $20 million along with a line of credit for $1.2 million (University of Phoenix, 2010). Lawrence Sports have two primary suppliers Gartner Products and Murray Leather Works. According to the scenario, “Mayo Stores is the world's leading retailer, Lawrence Sports primary customer, and accounts for 95% of the company’s sales” (University of Phoenix, 2010). Mayo Stores has “defaulted on 80%” of their outstanding payments, therefore, Lawrence Sports can not meet their financial obligations” (University of Phoenix, 2010). As a result, Lawrence Sports is “stretching payables” to Gartner Products and Murray Leather Works to meet other corporate expense obligations (University of Phoenix, 2010). By Lawrence Sports “stretching their payables”, the company worn out their line of credit with the bank (University of Phoenix, 2010). This paper will identify Lawrence Sports' issues, goals, evaluate risks and mitigations, and define metrics and measures to deal with the short-term and long-term financing needs of the company (University of Phoenix, 2010). Lawrence Sports’ working capital management is multi-faceted as most all-financial business plans are. There are strengths and weaknesses to their plan. The strengths are: their largest customer, Mayo, is responsible for 95% of their sales and is the largest retailer in the world. This is a solid customer who provides flexibility and stability for Lawrence Sports. In addition, Lawrence Sports has a flexible vendor in Murray who is willing to work with them. Lawrence Sports’ weaknesses are: Mayo accounts for 95% of their sales, which is not a diverse enough revenue stream and Murray, the flexible vendor has cash issues, which causes their flexibility to have limits. Businesses must take into account the following critical relationships when managing their working capital management; sales impacts, liquidity, relations with stakeholders and short-term financing mix (Emery, Finnerty, and Stowe, 2007). Lawrence Sports has the relationships that provide the ability to manage successfully their working capital. Lawrence Sport’s current assets and current liabilities are diverse enough to provide Lawrence Sports with some options going into the future. There are three philosophies that one may approach working capital management. These are the conservative approach, the maturity-matching approach and the aggressive approach (Emery, Finery, and Stowe, 2007). Each approach has its own costs, risks, and benefits. The cash conversion cycle for Lawrence Sports is managed among one primary customer, Mayo and two primary vendors, Gartner, and Murray (University of Phoenix, 2010). The cash conversion cycle for Lawrence Sports is critically important as Lawrence Sports needs to borrow as little money as possible from the bank to maintain its $50,000 cash balance at all times. The bank’s interest rates are steep and increase considerably with the more money that is borrowed. Lawrence Sports must manage its short-term financing in such a way that borrowing is mitigated. In this effort, Lawrence Sports needs to lower its inventory conversion period to as short as possible. By lowering the inventory conversion period, Lawrence Sports will have more flexibility in adjusting their inflows and outflows. Lawrence Sports must manage its short-term financing and cash in such a manner that the outflows to Murray and Gartner align more with the inflows from Mayo. There is opportunity with Lawrence Sports’ payables and receivables, inventory, and cash budgeting. Lawrence is not successfully managing the inflow and outflow of cash. The company is being very attached to Mayo Stores, which is Lawrence’s major client. Mayo is having a hard time paying for the products on time that forced Lawrence to be late on their payment to their creditor. “Firms use increasingly sophisticated cash management systems to monitor their cash and marketable securities and maintain their needed liquidity at minimum cost” (Corporate Financial Management, 2010, p.2). Working capital provides investors an idea of the company's basic operational efficiency. A positive working capital is a sign that a company is capable of paying off its short- term liabilities in a timely manner. Negative working capital means that a company currently is not capable of paying off its short- term liabilities with its present assets. An important planning tool that is necessary to Lawrence Sports is cash budgeting. Cash budgeting is a forecasting instrument that monitors all cash receipts and cash disbursements. It demonstrates how all plans effect cash, which could lead to an alteration of the company’s current budget if inadequate cash resources to fund the ventures are planned. With cash budgeting, Lawrence Sports can avoid surprises by predicting how much money the company will receive and how much the company will spend. Lawrence depends on their on-time payments from the customer; extend out their payments to the suppliers and a credit line. Instead of a long termed planning that can help Lawrence maintain control over the finances; the company appears to act more out of panic. Lawrence Sports needs to monitor the time between cash inflows and cash outflows. Because Mayo is the main source of Lawrence Sports cash, Lawrence must check how long it takes to receive the final payment from the time materials are ordered for Mayo. A cash budget would assist in showing when cash is required to pay invoices. In the situation of the bill is due before payment is received, Lawrence Sports should make the move for financing until payment is received. Lawrence Sports can try to bargain their payment terms with customers and suppliers to manage their balance between the inflows and outflows and rely less on short-term financing. A relationship with the company’s suppliers and the company’s creditworthiness are put in jeopardy with too many late payments. Viewing a cash budget can help the leaders of Lawrence Sports view in which the issues and opportunities are located and free up working capital. Lawrence Sports has few options to manage their working capital; one is to borrow through short-term loans. A “term loan” would allow Lawrence to borrow Lawrence can employ the use of commercial paper as a way to finance short-term goals. The second is to implement electronic payments from outside parties. With the use of electronic payments, Lawrence will be able receive timely payments and make timely payments. The third is to prepare an effective cash budget. “The firm must choose levels of cash and marketable securities, taking into account liquidity needs and any required compensating balances” (Corporate Financial Management, 2010, p3). By preparing a cash budget the company can monitor the inflows and outflows of the business and plan for any emergencies that may arise. A firm’s business policies in regard to both inventory and accounts receivable will dictate the flow of the cash flow cycle for that company. As current cash flow can either stimulate or hinder expansion, companies in the growth stage of development require more stringent guidelines in terms managing the money they are owed and the term of their raw materials. Upon evaluating receivable accounts against the time, which they have been outstanding; one can produce an aging schedule of money owed. Viewing receivable funds against time can help to determine if the current collection policy used by the firm is most suited to the current business plan. Aging schedules can provide not only the most outstanding sums of money, but also the average time of collection for all lines of credit. Aging schedules can also aid in implementing credit fractions for those accounts for whom delayed payments are more feasible. Credit fractions represent percentages of total sales repaid on a delayed schedule (Emery, Finnerty, & Stowe, 2007). Accepting payment on a deferred basis can allow companies to conduct business with more firms with less capital on hand and can provide flexibility when unforeseen circumstances arise. Controlling inventory through the stages of raw materials, works in progress, and finished goods also helps to determine a firm’s cash flow cycle. Keeping in mind the fixed costs involved with every influx of raw material, an intelligent inventory cycle can reduce production and storage costs while ensuring the right amount of finished product is available at all times to fulfill orders placed with the company. The economic order quantity, a value determined by considering both order and carrying costs represents the most balanced frequency of the raw material cycle (Emery, Finnerty, & Stowe, 2007). This calculation also needs to take into consideration the inherent discount in ordering by quantity. This economy of scale can reduce the order cost. When quantity discount is applied the balance between cost and economic order quantity must be rebalanced accordingly. Uncertainty in demand can decrease the accuracy of inventory control. If markets trends are know to flux, an extra amount of product may be kept on hand to act as a cushion during periods of high demand. The solace provided by these safety stocks comes at a price, as both production, and storage costs are increased consequently. Conclusion “Cash flows in a cycle into, around, and out of a company. It is the business lifeblood and every Chief Financial Officer’s primary goal is to help keep it flowing and to use the cash flow to generate profits.” (Answers Working Capital Management, 2010, p.1) A cash budget will help Lawrence Sport’s in forecasting any capital needs. Sustaining cash reserve will keep Lawrence Sports from depending on the line of credit but rather on credit policies, credit terms, and invoices to monitor cash inflow (Anonymous, 2010). Having a short-term financing strategy will keep interest payments low. The Chief Financial Officer will evaluate the cash conversion cycles and average collection periods to determine if the short-term and long-term objectives are successful. Finally, Lawrence Sports will implement a working capital policy in order to increase capital, customers, and dependable suppliers (Anonymous, 2010). References Anonymous. (2010). CFO Study Reveals More Companies Stretching Payment Dates. Managing Accounts Payable. November 2005, Vol. 5 Issue 11, p. 2-4. Retrieved December 31, 2009, from EBSCOhost database. Answers. (2010) Working Capital. Retrieved December 31, 2009, from http://www.answers.com/topic/ working capital. Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management (3rd ed.). New York, NY: Prentice-Hall. University of Phoenix (2010a). Simulation: Working Capital Management. Retrieved January 3, 2010, from University of Phoenix, rEsource, Simulation, MBA/571 Corporate Finance Web site. www.studyfinance.com (2010). Working Capital Management