April 2, 2013
Lawrence Sports Simulation
Liquidity must become a primary focus for any business hoping to create sustainable growth. Lawrence Sports, a fictional company, is presently in need of capital management analysis and methodology overhaul. Learning Team A will discuss three alternative working capital policies that reduce future difficulties and the recommendation on which policy Lawrence Sports should follow. The Three Alternatives
“In its day-to-day operations, a firm must maintain adequate liquidity. At the same time, it wants to operate as efficiently and profitably as possible. In this regard, there is a risk-return trade-off in the alternative managerial philosophies about how working capital should be financed. We can describe a firm’s philosophy about how it finances working capital as a maturity-matching approach, a conservative approach, or an aggressive approach (Stowe, Finnerty, & Emery, 2007). Conservative Approach
Shortage of working capital as emergency situations arise is the most important problem in the Lawrence sports simulation. Business partners are involved in this problem. For example Mayo stores only pays 20% of their total payments in the first week but they pay biggest portion which is 80% percent a week later. The other business partner, Gartner products, has same payment type. These two partners drive Lawrence sport to shortness the liquidity. In other word, there is no balance between inflow and out flow of cash in Lawrence sports. Though Mayo is responsible for the majority of sales for the firm, without a more conservative policy, payables will continue to be restrained. “The conservative approach is shown in below panel. Long-term financing is used to finance firm’s long-term assets, all of its permanent current assets, and some of its temporary current assets. As the below panel below explains only when asset needs are high will the firm use short-term financing. At other times, when asset needs are low, the firm has more long-term financing than it has assets needed to operate the firm. At these times, the firm invests the excess funds in marketable securities. By financing a portion of its seasonal needs for funds on a long-term basis, the firm builds in a margin of safety (Stowe, Finnerty, & Emery, 2007). “
If Lawrence sports use conservative approach they can get two advantages, first managers should make very good relationship with business partners. This strategy can bring on time cash to the company, company will able to pay off their bills on time. Lawrence Sports will be able to correct the cash flow problem with a conservative credit policy. This alternative receives the highest rating because without balanced receipts and disbursements, optimal trade off choices will not exist. When the CEO realizes that the liberal credit policy is a hindrance, the path to liquidity will surface. The second alternative to expand the supplier base is also important, however; not as critical as the credit policy implementation. As relations improve within the supply chain, Lawrence will find more time to consider new supplier options. The final alternative is a contingency plan for the loss of a vendor. When Murray and Gartner begin to receive reliable payments, outsourcing options can be measured as a cost advantage strategy. There is very good option to implement this alternative. The manager can change Mayo store’s term from 20% to 40% on sales. In this scenario the remaining for following week will decrease from 80% to 60% this can be very helpful for cash liquidity of company. Also they can change the term for “Gartner products, but Gartner products is a bigger company and Lawrence sports needs to keep them happier”. Gartner product can pay 40% on very first point of sale, but they can pay the rest in two different payment. They should pay their depth out in next and following week with 30% for each week. This strategy gives...