Lawrence Sports
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Abstract
In todays business environment, in order to maintain financial viability organizations must adhere to the basics of business strategy which is to be profitable and continually increase revenues for shareholders. Working capital is defined as “the assets of a business that can be applied to the operations” or “the amount of current assets which exceed the current liabilities” (Answers, 2007, para. 1) Working capital management involves the “deployment of current assets and current liabilities as to maximize short-term liquidity” (The Free Dictionary, 2007, para. 1). The intent of a working capital management policy is to ensure an organization is able to continue business operations and has adequate ability to satisfy both short-term debt and upcoming operational expenses. Simply stated, “good management of working capital will generate cash, improve profits and reduce risks” (Anonymous, 2007, para. 2).
Lawrence Sports, a manufacturer and distributor of sporting goods equipment, is currently facing a number working capital and cash flow management issues largely related to past due payment of their largest customer, Mayo Stores. This paper will take a closer look at Lawrence Sports simulation and identify the issues, goals, potential solutions, evaluate risks and define metrics to measure the success of the working capital management strategy selected to address the short and long-term financing needs of the organization.
Problem Solution: Lawrence Sports Inc.
In todays business world in order for an organization to walk the path of technological advancement, increasing profits and remain one step ahead of the curve, businesses must possess the ability to solve problems effectively and efficiently. There are different ways to approach defining the problems facing an organization; the focus needs to be on defining the problem correctly (University of Phoenix, 2007).
The context of the paper will examine the simulation of Lawrence Sports and provide an in-depth situation analysis starting with a brief background of the scenario, identify the issues and opportunities, explore stakeholder perspectives and ethical dilemmas. Continuing through the problem definition guidelines, a problem statement will be developed and end state goals will be identified which will provide the foundation for proposed solutions and analysis of the solutions. A risk assessment and mitigation will help to identify the optimal solution which will lead to the development of an implementation plan and finalize with a gap analysis.
Situation Analysis
Lawrence Sports is a manufacturer and distributor of protective sporting goods and currently has annual sales of $20 million. Lawrence Sports sources material from two primary vendors, Gartner Products and Murray Leather Works. Gartner Products is a $200 million revenue producer of precision testing equipment, cured leather and fabric for sports accessories and supplies Lawrence Sports with 70% of the raw material used (University of Phoenix, 2007a). Murray Leather Works is a $10 million revenue company and supplies Lawrence Sports with semi-finished leather products and accounts for 75% of their annual revenue (University of Phoenix, 2007a). Mayo Stores is the worlds leading retailer with over 3,000 stores in the United States, Canada, South America and Europe and accounts for 95% of Lawrence Sports sales (University of Phoenix, 2007a).
In recent weeks, Lawrence Sports primary customer, Mayo Stores, has defaulted on 80% of their outstanding payments. Because Mayo Stores accounts for 95% of Lawrence Sports revenues it has placed Lawrence Sports in a situation where they are unable to meet their financial obligations. As a result, Lawrence Sports has been forced to stretch payables to Gartner Products and Murray Leather Works as the outstanding line of credit and interest burden has increased. Lawrence Sport is facing several financial issues which need to be addressed in order for business operations to continue
Issue and Opportunity Identification
Lawrence Sports first issue is they have one major source of income, Mayo Stores. This source is not sufficient to meet the cash flow needs of the business without resorting to stretching payables and borrowing against the Central Bank line of credit. The opportunity for Lawrence Sports is to expand their customer base to improve cash inflows and reduce the companys need to rely on one customer for a source of revenue.
The second issue is Lawrence Sports is not effectively controlling the flow of cash. In effort to not impact sales figures, Lawrence Sports has accommodated Mayo Stores to the point it is not only taxing them financially but is also impacting Lawrence Sports sub-tier suppliers and their relationships. The opportunity for Lawrence Sports is to develop and implement a credit management policy which clearly identifies payment terms, including discounts for early payment and penalties in the case of default.
The third issue is the Lawrence Sports line of credit with Central Bank. While it offers Lawrence Sports with an alternative in their short term financing plan it has the disadvantages of being very costly to the organization when it becomes necessary to use. For example, in order for Lawrence Sport to pay off a “maxed out” line of credit, Lawrence Sports would have to come up with $1.2 million and 16% interest to bring the total to $1,392,000. The opportunity here is for Lawrence Sports to identify other short-term financing opportunities which provide lower costs to the organization such as hedging, commercial paper and investments.
Fourth, with the advent of regulations such as Sarbanes-Oxley, there is importance to have established, documented and embedded policies to govern how an organization manages key areas such as collections and dispute resolution. The challenge is to consistently apply best practices; the solution is automated workflow driven by embedded policy which will ensure process integrity and standardized approaches in order to manage accounts receivables balances (Protiviti, 2007).
Lawrence Sports has a number of issues which need to be address; however, if they are able to make positive changes toward better working capital management, the company can enjoy growth and prosperity. Lawrence needs to look at working capital management as an opportunity to better serve its stakeholders and improve its current economic standing.
Stakeholder Perspectives/Ethical Dilemmas
The stakeholders involved in the scenario are