April 10, 2013
Syed Farookh, MBA
Lawrence Sports Recommendation
The Lawrenceville sports simulation demonstrated that it was a juggling act just to make sure that the corporation had its bills paid and that everybody was happy including suppliers and customers. A company must be more organized in the way to it conducts its business. Policy must be set policies so that the operation of cash through the Corporation will flow much more easily. The three alternative working capital policies that would reduce future difficulties are what are needed to be explored in detail. After each one is examined a determination of which policy should be used will be recommended for Lawrence sports to follow. The following policy recommendations are as follows: The Matching Policy, The Aggressive Policy and The Conservative Policy.
One of the biggest problems that Lawrence sports faced was they had to pay back the bank on lines of credit. It seemed that the more credit that they obtained from the bank to get them over, the more interest that they had to pay to the bank which depleted profits from the corporation. There are times when other people’s money is good thing, and that is when it is used to make more money not paying off debts to creditors. Lawrence Sports could have done much better than the juggling act that it performed each week.
Evaluation of Risks
If Lawrence sports had a matching policy as a working capital procedure then it would always have enough money to pay its currents debts when they are due and use cash on hand to produce more profit. This is risky but profitable. Timing would be everything. Terms would have to be watched very carefully. Creditors would get paid, would be timed arrangements. Accounts receivables would have to be watched very carefully because the money that is owed to the company will be the cash being paid to its creditors. If a certain amount is due in 90 days, that amount will be available to the creditors in 90 days but a reserve may or may not be required. Keep current cash making more money is the plan and is called a matching policy. It can be profitable and it can be very effective, but it may sound risky. By not having a lot of cash on hand the money that they make can actually be used to make more money but they would not have a reserve on hand for creditors if certain monies are not received and suppliers would hold back product if they are not being paid.
An aggressive policy is paying your creditors as late as possible and your account receivables should be paying you as soon as possible. If Lawrence Sports did this then this would keep most of its money I the corporation. This will be maximizing its cash but it can have severe repercussions. One repercussion is that it might have is, that its creditors may not like waiting for a very long time to get their payment. A creditor that is not being paid on time may not want to ship your supplies on a timely basis. This would create a bottleneck and be a big problem for your operations.
A conservative policy is where you manage your current assets and current liabilities well. You create a buffer of cash to make up for any shortfalls. A comfortable reserve is on-hand to pay creditors. You have the ease of negotiating great terms with creditors and suppliers but using cash reserves to discount invoices. The main problem would be that it reduces the money used to increasing the production. Money wasted sitting in reserves cannot be used to create more profit for the corporation.
Lawrence Sports will need to negotiate with their creditors and suppliers in order to continue to maintain their business. The contingencies are basically circumstances and events that will help determine a particular outcome. In this case when we look at Lawrence we can devise a payment plan...