Lester Electronics

Running head: PROBLEM SOLUTION: LAWRENCE SPORTS INC.

Problem Solution: Lawrence Sports Inc.

Problem Solution: Lawrence Sports Inc.

In order make an accurate decision the evaluation of several areas should be observed. The maximization of shareholders wealth, financial statements, financial stability, and financial ratios, to name a few, can be utilized in order to make the most accurate decision possible. Financial distress could lead to bankruptcy when a corporation begins to acquire a significant amount of debt. In certain cases this may cause the managers to take on extra responsibilities. A number of possibilities will be altered and configured in order to achieve several possible scenarios of the company, the market and the economy. A firms operating exposure is determined by the structure of the markets and the firms ability to mitigate the effect of exchange rates by adjusting its markets, product mix and sourcing (Brealey, Myers and Allen, 2005).

This paper will make suggestions on how Lawrence Sports can develop a plan to maximize working capital policy and a cash budget. This paper will also show suggestions on how Lawrence Sports can develop metrics in order to monitor working capital management as well. Finally, there will be an example of a problem solving approach, which will demonstrate an approach, which will identify the problem, analyze alternatives and, create a solution.

Situation Analysis

Lawrence Sports is a $20 million revenue company, which manufactures and distributes equipment and protective gear for baseball, football, volleyball, and basketball. A Mayo store is the world's largest retailer, and happens to be Lawrence Sports primary customer. Lawrence Sports sources all of its materials from Gartner Products and Murray Leather Works. Gartner Products has an arrangement of products, which include woodworking products, fabrics for uniforms and caps, precision testing equipment, and cured leather. Lawrence Sports sources 70% of its raw materials from Gartner Products while contributing 95% of its sales. Murray Leather Works specializes in semi-finished leather products and is Lawrence Sports main customer contributing 75% of its sales.

Whenever there is a cash deficit problem, Lawrence Sports has set up an account to have money automatically borrowed from the bank to pay bills and maintain a minimum cash balance of $ 50,000. At the end of each month, the loan will be repaid automatically after retaining $50,000. Lawrence Sports must find a plan to keep its loans to a minimum by using working capital to pay off loans and stop deferring payments to its suppliers in order to maintain profits.

Estimated bank borrowing for Lawrence Sports has elevated to an all time high of $1.2 million, and the company still has a cash deficit situation. The $1.2 million is the agreed limit to borrow from the bank. Repayment to the bank is done during the last week of each month and the interest rate increases with the increase of the borrowed amount.

The account manager for Mayo wants to ask for immediate payment because Lawrence Sports will be processing a new order soon. Although Mayo is a valued customer asking for payment immediately may strain the working relationship the two companies have. Gartner is willing to defer payments, but this would give Gartner the power to refuse deliveries until payments are made. Gartner cannot afford to lose out on another account, but deferring payments for a short term should not affect the relationship.

The optimal decision for Lawrence Sports is to give Mayo an extra week for paying for the payment of sales the previous month. Continue with the existing agreement of paying Gartner 40% on purchases and the remaining 60% in the following week. This will put them in apposition to be able to pay Murray Leather Works 15% the last week of the month, 40% the next week and, 45% the week after. By doing this Lawrence Sports will be able to pay back 50% of the total borrowing for the month, which was $1,045,000. The strain would be taken off of the working capital position for a time, but not totally. The main focus here is to maintain good relationships with the business partners by borrowing additionally from the bank during the month and take care to achieve a trade-off between maintaining good relationships with business partners and still be able to cater to Lawrence Sports' capital needs in the future. There will be prompt payments because when dealing with this amount of cash and electronic funding, there is no delay. The bulk of payments between two companies are now made electronically, so that in the United States electronic funds transfer accounts for 93% of payments by value (Brealey et. al., 2005).

Next within the scenario, there was an unexpected increase in cash flow and a tough stance needs to be taken with the business partners because Lawrence Sports can not afford another huge bank loan. A consignment that reached Mayo earlier in the month had some broken equipment due to poor handling during transport. Lawrence Sports is being blamed for poor packaging and has to pay $250,000 for a contract-closure fee. The broken equipment also has to be replaced. This will mean that there must be an emergency purchase of $100,000 from Gartner on 100% cash down basis. In order to find the money, Lawrence Sports must at least pay 30% to Mayo the first week and the remaining 70% the week after. Murray should be pleased on the decision to pay 15% on purchases and the remaining 85% the following week.

Issues and Opportunities

Lawrence Sports also has an opportunity to explore other forms of short-term borrowing. Lawrence sports could consider a term loan in order to make the loan burden disappear for the next four to five years. A term loan is repaid in level amounts with a single bullet payment at maturity, which is usually four to five years (Brealey et. al., 2005). Lawrence sports must prevent revenue leakage. Leakage can occur when revenues are written-off due to old invoice problems, disputes, and sales to high-risk customers. This situation usually results from badly implemented processes. Fixing the problem includes addressing invoice issues early, expediting dispute resolution, and, identifying and correcting the root-causes of issues. Also, identifying high-risk customers up front and keeping their accounts receivables balances low through aggressive follow-up will contribute to fewer bad debts and reduced requirements for bad debt reserve.

Lawrence Sports can also increase velocity. Their effectiveness as an organization

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