Problem Solution: Lawrence Sports

Problem Solution: Lawrence Sports Inc.

The significance of developing a working capital policy that allows a company to prepare for long-term opportunities is extremely important in today’s ultra-competitive business world. The scenario facing Lawrence Sports is one that emphasizes the need to secure a firm's optimal cash balance to help cover emergency costs. The scenario also places emphasis on the importance of having adequate collection policies and payment terms. By developing metrics to monitor working capital management, firms allow themselves the opportunity to increase their revenues and optimize their resources.

Situation Analysis

Issue and Opportunity Identification

Lawrence Sports is a $20 million revenue company that manufactures and distributes equipment and protective gear for baseball, football, basketball, and volleyball. Lawrence’s principal customer is Mayo Store, the world’s leading retailer; they comprise 95% of Lawrence Sport’s annual sales. Gartner Products and Murray Leather Works are Lawrence’s two main suppliers. Gartner Products is an industry leader owning 37% of the market with revenues over $200 million. Lawrence does not have very much bargaining power with Gartner even though Lawrence sources about 70% of its raw materials from Gartner. Murray Leather Works is a significantly smaller company than Gartner with annual company revenues at $10 million. Lawrence does enjoy a better bargaining position with Gartner as Lawrence makes up for about 75% of Murray’s sales (University of Phoenix, 2002).

Good cash management is the backbone of all well-run organizations. When day-to-day cash flows are taken care of smoothly, firms are better able to concentrate on long term opportunities. By establishing a positive cash balance position, Lawrence will be better prepared for unforeseen emergencies. By establishing better cash balance positioning the consequences of unplanned cash outflow is mitigated. Currently to handle any cash deficit situations money is borrowed automatically from the bank to cover operating expenses and maintain a minimum cash balance of $50,000. The credit limit has been set at $1.2 million with any loan amount being repaid automatically at the end of each month. In the first week with the company, Mayo, Lawrence’s principal customer, has defaulted the 80% outstanding payments from the previous two weeks and have notified Lawrence not to expect any money from them