Problem Solution: Lawrence Sports Inc.

Problem Solution: Lawrence Sports Inc.

Lawrence Sports (Lawrence) has encountered issues with maintaining enough cash flow to operate properly and is on the verge of financial destruction. In order improve their current working capital management and cash budget, Lawrence must implement approaches that will allow them to have capital available whenever needed while optimizing its resources. Several processes are available in which Lawrence can use to maximize liquidity and ensure cash optimization allowing them to improve their current financial situation. This paper will discuss solutions to help Lawrence develop a working capital policy, a cash budget to optimize their working capital, and metrics to monitor working capital management.

Situation Analysis

Issue and Opportunity Identification

Lawrence is using short-term financing in the form of bank loans to cover inventory costs due to debts which have occurred as a cyclic effect of Mayo defaulting on loans over three consecutive months. Lawrence needs to establish a collection policy to prevent future debt loss and collect Mayo’s current debt, future debt, and arrears. “Companies must maintain established credit limits and collection periods in order to minimize bad debt losses. In general, operating agencies should establish credit limits and collection periods consistent with trade practice for that type of receivable” (Author unknown, n.d., p 2). Mayo’s outstanding accounts receivables has resulted in Lawrence experiencing an increasing deficit and difficulties paying Gartner and Murray. Lawrence’s use of short-term financing to raise capital from sales to pay their accounts receivables and making smaller payments to Gartner and Murray over a longer period has placed payments weeks behind resulting in Lawrence spending millions of dollars in bad debt expense. If Lawrence does not address these issues and take advantage of opportunities available the potential of bankruptcy occurring in the near future is definite. “The ability to successfully forecast and manage cash inflows and outflows is vital to realize profitability in today's demanding business environment” (Emagia Corp, 2004).

Stakeholder Perspectives/Ethical Dilemmas

Several stakeholders as well as potential ethical dilemmas are involved in Lawrence’s situation. The stakeholders include the CFO and finance managers, Lawrence’s main customer Mayo, Lawrence’s suppliers Gartner and Murray, employees, customers, and the community. The primary stakeholders; Mayo, Murray, Gartner, and the CFO and finance managers play a vital role in Lawrence’s success and negative or positive issues will have a heavy impact on all stakeholders either directly or indirectly. Lawrence, Mayo, Murray, and Gartner are part of a cycle of net working capital for each other as they bring about assets and liabilities with the purchase of goods, and accumulation and payment of debt.

Lawrence is concerned with making profits and satisfying their customers and suppliers. They have the right to receive quality material and payment for the goods in which they sell. Ethical dilemmas exist when Mayo is withholding payment of their debts to Lawrence and Lawrence in turn is delaying payments to Gartner and Mayo. The question exists: Is it ethical to conduct business in such a manner as to jeopardize the livelihood of other companies or individuals?

Lawrence sells finished sporting goods to Mayo, the principle customer for Lawrence, contributing to about 95% of Lawrence’s sales. Mayo’s responsibility is to pay its debts to Lawrence in a timely manor. Mayo’s primary concern is obtaining sporting equipment and gear to supply to their customers. Ethical dilemmas have occurred as they have defaulted on several loans to Lawrence.

Lawrence buys material from Gartner