Lawson is a general merchandising retailer in Riverdale, Ontario, which has had four consecutive years of revenue and profit increases. The owner, Paul Mackay wanted to operate a store that stressed value at competitive prices targeting low to middle income families. With a wide range of products, Paul has been using only one supplier. The supplier, FWL allows Paul to order on credit and pay at scheduled intervals. Problem Statement
Lawson is a clothing retailer who has recently met with a bank official asking them for a couple of new services from the bank. The first new service that they have requested is a bank loan that would be used to pay down their trade debt. Their current interest rate on the trade debt is 13.5% and the owner of Lawson, Paul MacKay, feels that he can secure a bank loan that would in turn have a lower interest rate. The second new service that they have requested is a line of credit, the line of credit would be used to help, when the sales are down and cash flow is short. Paul feels that a line of credit will ensure that the store will be able to meet their debt obligation with their main trade supplier. Lawson is also carrying a lot of inventory on their balance sheet, since they have a high inventory their trade debt is also fairly large as they are on a basis similar to consignment with the supplier. Analysis
When looking at this case we have to see whether a bank loan would be the most advantage solution to the problem. I believe that a bank loan if secured will decrease the interest that is being paid on the outstanding trade debt. I do not think that the bank loan is the most economical way to approach the increase in trade debt that Lawson has. Lawson needs to look at the increase that they have in their inventory. A question that needs to be asked is why the inventory has increased so much in the last few years. Is Lawson over estimating their need for...
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