lawrence problem solution

University Degree Business and Administrative studies

Lawrence Sports Inc.

Running head: PROBLEM SOLUTION: LAWRENCE SPORTS INC.

Problem Solution: Lawrence Sports Inc.

University of Phoenix

Problem Solution: Lawrence Sports Inc.

Introduction

In the current business economy, business entities are highly concerned with maximizing liquidity and ensuring cash optimization (Keeler, 2005). Good cash management is an essential and very important activity of every business entity. “Working capital is truly the life blood of any business big or small.” (Unknown author2005) “Working capital is the cash a business requires for its day-to-day operations, and for financing the conversion of raw materials into finished goods, which the entity sells for payment.” (Unknown author 2003) An effective and efficient management staff will manage the entity’s bottom line of working capital and realize that in order to improve the bottom line, management has to understand the tradeoff of maintaining good relationships with customers and vendors in order to protect their profits.

This case will present Lawrence Sports Scenario, trying to illustrate and reveal some points about the working capital management and some changes that can enforce many large corporations to revise their strategic and the way of operating their activates to promote more competitive strategies in order to gain more productivity and profitability in their business.

The aim of this essay is to examine these changes and assess their impacts.

Situation Analysis

Issue and Opportunity Identification

The Lawrence Sports situation uses their working capital and bank borrowing to finance operations. This is a concern for Lawrence because they have set goals of increasing the working capital while minimizing bank borrowing. Their plan focuses on explaining the situation faced by Lawrence to both suppliers and retailer. Lawrence expects to renegotiate agreements with each vendor so do not cause undue harm to anyone in the process. The ideal situation in this scenario called for a tradeoff that needed to be reached between both suppliers and the retailer, both could not be kept happy without affecting the strategies and goals of the Lawrence organization. There had to be new agreements in place that would be acceptable for everyone, Lawrence decided to give Mayo an extra week for payment while changing invoicing options to Gartner. They allowed the payment to be delayed to Murray, as a small vendor they were deemed to be the more understanding of the two suppliers.

As the simulation titled “Working Capital” illustrated, businesses face numerous challenges in effectively managing cash and working capital. Some of these financial challenges from the simulation included:

Effectively managing positive working capital

Reduce debt and lower financing costs

Achieve balance between maintaining positive relationships with clients and ensuring the company’s working capital needs are met

Negotiating payment and collection arrangements

Lawrence Sports experienced all the above-stated financial challenges. In March 31 – April 6, Mayo, the entity’s principal customer, defaulted 80% of the outstanding payments for the weeks March 17 – 23 and March 24 – 30. Mayo then announced that it would not be able to pay until April 14 – 20. As a result, Lawrence Sports had to borrow funds from the bank and defer payment ...

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Reduce debt and lower financing costs

Achieve balance between maintaining positive relationships with clients and ensuring the company’s working capital needs are met

Negotiating payment and collection arrangements

The second challenge occurred when Lawrence Sports had to take out a loan to pay its bills because of the delayed payments and as a result the entity’s cash flow showed a negative balance. Lawrence Sports had to decide whether to focus on maintaining favorable relationships with its delinquent account holders or to secure positive cash flows within the entity. The third challenge occurred when a consignment article arrived at Mayo with broken equipment. Lawrence Sports, erroneously blamed for poor packing even though it was apparent poor handling during transport caused the damage, was forced to accept responsibility to maintain peace. The entity was forced to pay a contract closure fee of $250,000 and replace the broken equipment at a cost of $100,000. The unexpected hike in cash outflow poses a new challenge to the entity and Lawrence Sports is faced with either requesting a 30% payment on sales and the remaining 70% in the following week from Mayo or continue the existing arrangement paying 40% on purchases and the remaining 60% in the following week; or finally defer payments to Murray Company.

Stakeholder Perspectives/Ethical Dilemmas

Finance is a problem because each business unit revolves around finance and increasing the value of capital. Shareholders of the firm look at growth potential and make their investments often using methods like weighted average cost of capital, discounted cash flows and capital asset pricing model. By employing these methods, the risk can be measured by using capital asset pricing model. Investors do not like risky investments. Therefore, it is very important to have a balance between Debt and Equity.

The inner challenge seems to revolve around the development of a working relationship based on trust, mutual respect, open communication, and understanding among stakeholders about each other's strengths and weaknesses. Stakeholders’ from each area bring his or her own organizational mandates, interests, competencies and weaknesses to partnerships.(Global Knowledge Partnership) Stakeholders include customers, employees, investors and suppliers as well as community groups, media, non-governmental organizations and regulators. Stakeholder engagement is an important part of an organizations activity. A business seeks out activities with organizations that can provide critical and positive feedback on policies, programs and performance. These interactions help to better understand the markets.

Problem Statement

A problem arises when trying to maintain business relationships and balancing the organizations working capital and borrowing requirements. This was accomplished in an ethical manner by finding common ground and reaching agreements with all involved. Although this was difficult, at certain points the retailer-Mayo- had to be held to their word for payment in April, so not to create undue burden for Lawrence and its suppliers. This also required the stretching of payments to vendors. It was beyond Lawrence’s control.

The difference in the possible outcomes of the simulation was the decision to delaying payment to Murray and renegotiate terms with all involved. This allowed the organization to achieve its goals of increasing working capital while decreasing borrowing.

End-State Vision

As the financial manager of Lawrence Sports the company’s cash position is of my highest concern. It is a tremendous part of my duty that I have to take care of the collection and payment policies. Mayo Stores has created difficulty with our working capital management. We have developed options to improve our cash flow and reduce high interest debt.

Alternative Solutions

The long term customer relationships can be maintained by providing excellent products backed by service at reasonable prices. Our relationship can also be maintained by offering discounts, promotions, complementary gifts and product differentiation.

It is recommended that Lawrence review’s their vendor payment policies to be sure they are in line with the industry standards. If payment agreements are not meeting expectation with industry averages, Lawrence may need to renegotiate with vendors to receive additional compensation or concessions. There are special cases when vendors who might perish if payments are delayed--decision should be discussed with the vendor before delaying payment. However, partnerships also have inherent risks that can be damaging to all parties involved. For example, Lawrence Sports may face bankruptcy if the retailer Mayo discontinues carrying Lawrence’s products. The heavy reliance on Gartner as their majority provider of raw materials can create a risk that may destroy the relationship.

The financial manager must balance the many issues involved with working capital. Future revenues, collections, bad debts, disbursements, borrowing and loan repayment must be kept under control, while attempting to keep the stakeholders of the company happy. Since the main objective of a corporation is to maximize the value of shareholders’ investments naturally they expect the financial manager to make decisions with the shareholders best interest in mind.

The company cash flow can be seriously affected if we do not look to renegotiate the payment agreements previously made with the Mayo and Gartner organizations. Therefore, we should not overestimate the partnership benefits, while ignoring the potential risks associated with the company’s cash flow and bank borrowing policies. The company should be independent from Gartner in order to stay competitive and maintain partnership complacency. The company should expand its market to reduce the effects from externalities and continue to keep a good working relationship with the Mayo organization.

To keep the company’s cash flow optimal, financial managers must constantly negotiate price terms and financing with customers and suppliers. They need to try to obtain better collection and payment schedules to help maximize cash flow. An important fact that financial managers must keep in mind is that their decisions affect not only the cash flow of their corporation, but the cash flow of the customers and suppliers as well.

Analysis of Alternative Solutions – Bench mark

Careful consideration of all alternative options available when working capital problems arise is one way to alleviate possible discontent on the part of business partners. Borrowing is an important option; the organization should avoid over-investing in growth and keep some extra cash in short-term liquid investments such as marketable securities. This is another option that can help a company better prepare for unforeseen emergencies.

Risk Assessment and Mitigation Techniques

Risk management applies the notion that risks can be mitigated through the practical and historical analysis of an element, respective of the variability of its conditions. This practice is inherent in the individual lives of today’s members of society as well as the business world. Corporations must assess the risks present in their capital raising investing methodology and must evaluate the potential aspects that may enhance or endanger the continuation of their enterprise.

Optimal Solution

Short-term negotiation will be more beneficial to Lawrence Sports than increasing loan burden. If a customer is going to default on a payment management will request the senior account manager negotiate a payment plan extension that is beneficial to both parties. Perhaps the customer does not need to default for as long as initially proposed (Ross, Westerfield & Jaffe, 2005). Planning ahead requires Lawrence to consider events that could cause problems in the future such as defective product, deferred payments, or rising costs (Brealey, Myers & Allen, 2005).

Implementation Plan

There are many different factors that go into the decisions of how to handle the payment with Mayo, Gartner, and Murray. It is necessary to look at the satisfaction level with each relationship. If unhappy for more than a week Gartner may cut off delivering supplies, which will cause a hardship for Lawrence. Mayo is one of the larger clients and it is important that they are satisfied, unfavorable decision making may force Mayo to eliminate Lawrence products in the future. Murray is a small company that will suffer hardships if we do not pay them on time. It is necessary to take this into consideration when making the decision to coordinate the financial inflows and outflows.

Evaluation of Results

Once Lawrence finds the right solution to solve its problems it will notice the difference in its cash, rather than borrowing more money from the bank. Meeting payments on loans that are borrowed must be accomplished in order to make sure there is a consistent inflow of cash. As much as the business relationships are needed to stay strong, the financial situation of the company is a priority. We have a financial responsibility to pay Murray the funds that are due to them, if Gartner does not receive the funds they need they will refuse to deliver their products which will destroy our working relationship.

Conclusion

Working capital is what floats a business. Without enough cash to pay suppliers, the suppliers will stop supplying necessary products. Managing finances comes with a certain amount of risk, if all money were placed in checking or savings accounts; the chances of growth are slim. Efficiently managing and understanding the related risk is extremely important. Successful negotiations will allow Lawrence to keep the cash flowing without incurring additional bank loan debt. Avoidance of additional bank loan debt will allow Lawrence to eventually develop a positive cash balance and be better prepared for future problems.

References

Unknown Author, Advanceme.com 2005 Working Capital Management. Retrieved on March 12, 2007 from http://www.advanceme.com/sub/working_capital_management.htm.

Anonymous (November 2005), Working Capital Management Simulation, Retrieved March 13, 2007 from the University of Phoenix e-Resource website: https://mycampus.phoenix.edu/secure/resource/vendors/tata/sims/finance/finance_simulation1.html

Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of Corporate Finance. New

York: McGraw Hill Companies, Retrieved March 12, 2007 from the University of

Phoenix Online e-Resource.

Unknown Author Retrieved March 12, 2007

Unknown Author www.investopedia.com(2003) Retrieved March 13, 2007

Ross, S.A., Westerfield, R.W., & Jaffe, J. (2005). Corporate Finance. New York:

McGraw Hill Companies, Retrieved March 13, 2007 from the University of

Phoenix Online e