Lawrence Sports

Problem Solution: Lawrence Sports Inc.

Presently Lawrence Sports has had to make some short-term decisions concerning its working capital management. In order to learn from this experience they will develop a working capital policy which will increase the predictability and efficiency of their cash.

Situation Analysis

Issue and Opportunity Identification

There are three main issues that must be addressed. First Lawrence must determine the target cash balance to meet the daily needs of the business. Second, if there is cash beyond the target balance, it must be invested to maximize the return on this idle cash. Lastly, the company should develop a method of cash collection and disbursement to create predictability in the flow of cash.

If the company is able to develop a policy that incorporates these three elements, it will be able to maximize the return on its cash. Further it will not have to abuse its relationship with Mayo, Gartner Partners, or Murray Corporation.

Stakeholder Perspectives/Ethical Dilemmas

There are several perspectives that Lawrence must consider when designing a working capital and a cash budget policy. Lawrence Sports primary focus is the shareholders of the company. Aside from this Lawrence does not have an ethical obligation beyond legal limits. They should perform business practices in a manner which preserves relationships whenever possible.

First, Lawrence has little clout with Mayo Stores. Specifically, Mayo accounts for 95% of Lawrence's sales. As a result, a poor working relationship will only affect Lawrence in the long run.

Second, Gartner Products, which accounts for 70% of Lawrence's raw materials, is one of two vendors which service the company. Unfortunately, for Lawrence they do not account for a significant share of their business. Although, Lawrence can apply a working capital policy to Gartner, they run the risk of the vendor canceling the relationship. This in turn, will have a negative impact for the shareholders.

Third, Lawrence the greatest leverage with Murray Corporation, because the company accounts for 75% of Murray's sales. By stretching payments beyond a point, Lawrence can bankrupt the company. Ethically Lawrence has the responsibility to fulfill monetary obligations in a manner which meet the terms of sale. Although they have the ability to alter the terms based solely on the amount of sales Murray receives.

Problem Statement

Lawrence Sports will develop a working capital policy and a cash budget to optimize working capital by benchmarking current industry practices.

End-State Vision

Lawrence wants to implement a strategy which looks beyond the current issue and prevents them from happening again. Specifically, the company envisions a working capital policy which facilitates the collection and disbursements of cash, investment of idle cash, and maintains a target balance. As a result the company can expect predictability in its cash flows and maximize the use of its cash for the shareholders.

Alternative Solutions

Background

Gene Siciliano is a CPA, CMC, and the founder and president of Western Management Associates, a financial management consulting and seminar firm in Los Angeles, California. They have consulted many organizations on their credit policies. Based on the experiences of his organization he makes some recommendations concerning the credit policy companies should use.

Action

Everyone attempts to manage their cash flow, especially the cash going out. Some companies pay late simply because they can. Others pay late because they must in order to survive. The following are some strategies for getting a clearer assessment of customer's financial health.

Profit vs. Cash Flow

Profit is always different from cash flows. The article recommends to ask for 3 to 6 months of monthly financial statements, including monthly statements of cash flow, in order to get a sense of the trend of the company's performance. Next lay these reports side by side this can yield insights into what is happening to the cash the customer is generating. (Siciliano, 2001)

The Quality of Working Capital

Ask yourself some questions about their working capital. First is the working capital positive? If the answer is yes, then is the positive trend increasing or decreasing? Lastly, you must determine the quality of the cash flows. You can accomplish this by looking at the balance sheet, and look for these warning signs of future liquidity declines:

* Inventories are a high percentage of current assets, and getting higher, in comparison with others in their industry.

* They have an annual sell cycle that has passed, e.g. toys in January, and inventories haven not dropped enough from peak levels.

* Receivables are climbing at a faster rate than sales.

* Payables are climbing at a faster rate than receivables or inventories.

* Their inventories are in an industry that is more susceptible to losses than most, e.g. fashion clothing and perishables; and reserves do not seem adequate. (Siciliano, 2001)

Sources of Information

The internet is an excellent source of information. It is easier than ever to get valuable information. The Internet is becoming a great new source of insight into your customers. Some of the sources on the internet include:

* Credit databases

* www.sec.gov/edgarhp.htm - useful site for financial reports

* www.rmahq.org, Risk Management Associates (Siciliano, 2001)

Outcome

Based on the consolation, Siciliano has been able to improve the performance of some organizations. Specifically, he has been able to increase the ability to identify credit worthy vendors and customers. Although, he admittedly states you will not always be correct, you can improve on the risk that you are taking.

Situation

KeySpan, a Brooklyn, N.Y., energy utility, had trouble paying its bills. The company's accounts payable department was overrun with paperwork, processing up to 300,000 invoices each year. There was a consistent five day backlog. As a result,