Lawrence Problem Solution

Problem Solution: Lawrence Sports Inc.

In an effort to optimize a company's performance, it is important for a company to identify potential solutions and implement a strategic financial management plan. Lawrence Sports is a manufacturing and distribution company of sporting goods currently faced with a range of issues. If these issues are managed properly, Lawrence can turn these issues into opportunities for increased profitability and improved business operations. Some of the issues Lawrence faces include collecting payment from a primary customer who has defaulted on it's debt for goods and services, cash inflow and outflow inconsistencies, maintaining sufficient cash reserves, and debt accumulation and payment plans. 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. Within this paper, I will take a closer look at Lawrence's dilemma and determine a viable solution that will increase cash inflow so that Lawrence will have adequate outflow to pay debt and working capital to handle unforeseen circumstances.

Situation Analysis

Issue and Opportunity Identification

Lawrence Sports has a multitude of issues that the company needs to address. If the company effectively addresses these issues, the company will be able to make a positive change toward better working capital management. In addition, Lawrence Sports will be able to enjoy growth and wealth. Lawrence's finance team failed to carefully identify the company's goals in terms of developing a working capital policy and a cash budget to optimize the working capital. At the present time, Lawrence is not effectively controlling the inflow and outflow of cash. The company is being very accommodating to Mayo Stores, which is Lawrence's principal customer. Mayo is having a difficult time paying for the products on time which has placed Lawrence in a situation where the creditors are not paid on time.

Working capital gives investors an idea of the company's underlying operational efficiency (Working Capital, 2007). A positive working capital is an indication 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 unable to meet its short-term liabilities with its current assets such as cash and accounts receivable (Working Capital, 2007).

An important planning tool that is essential to Lawrence Sports is cash budgeting. It is a forecasting tool that tracks 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 there are inadequate cash resources to fund the ventures 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 Sports has a credit line with high interest rates and is in a constant state of worry in regards to paying off the loan without borrowing any more money. The impact is felt amongst the company's customers and suppliers. Lawrence 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 panic versus long termed planning that can help maintain control over the finances. Lawrence Sports needs to monitor the time between cash inflows and cash outflows. 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 assist 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 rely less on short-term financing to pay the bills until the final payment arrives. 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 where the issues and opportunities are located and free up working capital.

Stakeholder Perspectives/Ethical Dilemmas

A stakeholder is someone who has a general interest or something invested in a company. These people generally affect or are affected by the company. I have identified several key stakeholders that will be greatly affected by the implementation of a new working capital policy and cash budget management system. The main stakeholders are Lawrence Sport's management, employees, Mayo Stores, and the suppliers. There is a significant difference between each stakeholder's interests, rights, and values. This definitely leads to conflicting interests between the groups. This is primarily due to the fact that each group is only interested in how they will be affected by the situation.

Management is responsible for keeping the company afloat from week to week and producing profits. Management has already been unsuccessful in ensuring timely payments to its suppliers by delaying payments to Gartner. A successful implementation of a revised working capital policy would greatly enhance Lawrence Sports changes of increasing their market share and tap into a bigger customer base.

Employees are another major group of stakeholders in Lawrence Sports. Employees are the foundation of Lawrence Sports and possess the power to potentially make or break an organization. The livelihood of the employees will be jeopardized if effective cash management systems are not in place.

Mayo Stores is a major stakeholder in Lawrence Sports. Mayo Stores is in control since they know that they are the major source of Lawrence's lifeline to maintain business. Lawrence is leery of upsetting Mayo's management and is reluctant when it comes to making any changes to Lawrence's dealings with Mayo. However, if Lawrence fails to do so this could jeopardize the future of the company.

Another major group of shareholders include Lawrence Sports suppliers. Lawrence has not lived up to its obligation by paying its suppliers in a timely manner. These suppliers are in the business of making money and expect timely payments. If Lawrence continues to make untimely payments, this could jeopardize the company's relationship with