Working Capital Policy Paper

Running head: WORKING CAPITAL POLICY PAPER

Working Capital Policy Paper: Lawrence Sports

Larry Sailes

University of Phoenix

MBA 550

Lawrence Sports Working Capital Policy Paper

In a competitive business world, successful organizations understand the importance of critical-thinking in the decision-making process. To make sound business decisions, organizations must combine strategic planning with comprehensive data analysis, which includes the evaluation of financial and non-financial records and processes. Management and those involved with maintaining the company’s financial health use a variety of tools, methodologies, and performance metrics to gain a better understanding of the company’s current financial state, create reliable forecasts, and formulate and implement solutions for the company.

Organizational leaders realize that to make the most optimal decision, the company has to fully evaluate all aspects of the company’s operations including policies and procedures. Using Lawrence Sports (“Lawrence”) as the main subject of the case study, this paper will provide recommendations on how Lawrence’s working capital policy should be crafted. The working capital policy is imperative to Lawrence’s success because the policy serves as a strategy on how the organization can maximize its resources. “The working capital policy is the firm’s policy about its working capital level and how its working capital should be financed… decisions about how much to keep in its cash account, what level of inventory to maintain, and how much to allow receivables to build up” (Danh, 1999). The working capital policy also includes handling creditors, debtors, inventory, and possible sources of additional working capital. The working capital policy will assist Lawrence Sports in making sound business decisions on how it shall finance its existing assets. In crafting this policy, Lawrence must take into account the positive and negative impact these polices would have on the company’s profitability. Moreover, Lawrence needs to be aware of different approach to mitigate those risks or negative impacts. The recommendations below should be carefully evaluated and considered to financially benefit Lawrence Sports and help in strategically positioning the company for future growth.

Situation Overview

Lawrence Sports, a successful manufacturer and distributor of sports gear and equipment, is experiencing financial distress. Mayo Stores, accounting for 95% of Lawrence Sports’ sales, has 80% of the outstanding payments go into default. Lawrence has hit the maximum bank borrowing per month ($1.2 million) allowed by Central Bank. Despite having access to short-term financing from Central Bank, Lawrence is having a difficult time managing its cash flow. Lawrence has already deferred its payments to Gartner and Murray Leather Works. Lawrence has a difficult task of maintaining a healthy financial health, paying its vendors, and collecting money from Mayo while maintaining a positive relationship with its primary client. However, it is crucial for Lawrence to pay its vendors and maintain a positive relationship with them. At the same token, Lawrence has to be very diplomatic yet assertive with Mayo to get the outstanding invoices/payments. If Mayo does not pay on time, extreme pressure will be put on Lawrence’s finances and could result into more serious problems down the line (i.e. bankruptcy). However, if Lawrence’s collection approach with Mayo is too aggressive, Lawrence may find losing a significant amount of its business and may force Lawrence to go into bankruptcy. Lawrence’s objectives are to collect money from Mayo Stores and other clients, pay its vendors particularly Murray and Gartner, and to create a plan that will ensure Lawrence Sports will always have a positive cash flow. Therefore, it is imperative that Lawrence Sports create a working capital policy which will help the organization address existing dilemma, Moreover, these policies would help Lawrence minimize similar incidents from happening as well as assist in addressing these problems in the future.

Working Capital Policy

One of the key elements of the working capital policy is the cash budget, also called short-term cash forecasting. Cash budgeting is a critical tool or component of any business operation. According to Hauser and Edwards (1990), “cash budgeting leads to