Fin 571 - Lawrence Sports Simulation

Lawrence Sports Simulation

Corporate Finance

FIN 571

Lawrence Sports Simulation

Executive Summary

Lawrence Sports is a $20 million dollar company that manufactures and distributes protective gear for football, baseball basketball and volleyball. Lawrence Sports has three major business partners, Mayo Stores, Gartner and, Murray Leather. Mayo Stores, the world's leading retailer, is Lawrence Sport's principal customer. Mayo Sports accounts for 95% of Lawrence Sports profit and is the primary basis of inventory analysis. Lawrence's credit terms with the Mayo Stores are 20% collection when ordering and 80% the following week. Mayo's payment delinquency has caused cash flow issues for Lawrence. Lawrence pays 40% at time of purchase to Gartner and 15% to Murray and pays the remaining balances the following week (University of Phoenix, 2009). Learning Team has the responsibility of handling the company's working capital management. The goal is to accomplish Lawrence's capital needs while maintaining excellent relationships with business partners. The Team contemplated three alternatives to working capital polices which include renegotiating payment terms with trade suppliers and credit terms with Mayo and an accounts receivable factoring system. The recommendation is to keep debt burden at a minimal and renegotiate the company's payment arrangements with trade suppliers.

Alternative Solutions to Working Capital Policies

Trade Suppliers

An important aspect of working capital management is evaluating business policies related to inventories and account receivables. Lawrence Sports should demonstrate practical and proactive behavior along with the ability to manage cash inflows and outflows. In the matter of relationships with vendors and customers, it is imperative to utilize effective capital management skills while achieving a balanced trade-off between business partners and the company's strategic goals (Emery, Finnerty, & Stowe, 2007) . Lawrence Sports management should renegotiate payment terms with vendors and collection policies with clients.

Lawrence Sports has three major business partners, Mayo Stores, Gartner and, Murray Leather. Mayo Sports accounts for 95% of Lawrence Sports profit and is the primary basis of inventory analysis. Lawrence collects 20% at time of purchase and the remaining the following week. Lawrence pays 40% at time of purchase to Gartner and 15% to Murray and pays the remaining balances the following week (University of Phoenix, 2009). At first glance, it appears there is no sufficient cash inflow to balance the outflow which will force Lawrence to borrow more and pay more in interest because of the higher amount borrowed. The Team suggested renegotiating terms with Mayo Stores to request 35% upon purchase and the remaining 65% in two weeks. The recommendation for the new credit terms Lawrence Sports with Gartner is 25% payment upon purchase and 75% in two weeks. The new credit term Lawrence Sports with Murray is 0% payment upon purchase and 100% payment in two weeks. Based on the scenario, increasing payments upset Mayo Stores, but they were willing to cooperate. Suppliers will also likely cooperate because some revenue is better than none. Renegotiating terms on payments and receivables with business partners will increase working capital (Daks, 2009).

Trade Credit Policy

One of the problems facing Lawrence Sport is an ineffective collection policy. "The Collection Process is the art of managing relationship with the customer" (Rastogi, 2009, p. 3). Mayo Stores have been delinquent in making their payments; thereby, creating a financial burden for Lawrence Sports. A collection policy is only as strong as the company willingness to enforce it. Lawrence must move from being reactive to become proactive in their debt collections management by re-negotiate payment and collection terms with Mayo Stores while preserving good customer relations.

Full payment is desired upon delivery of the product or service; however, Lawrence could offer a cash discount for early payments. A cash discount such as 5/10, net 30 would require Mayo to make their payments within the first 10 days and receive a 5% discount of the balance due. Payments not received within the first 10 days would not receive a discount. Payments to include partial payments are acceptable through preauthorized checks or electronic funds transfer (EFT) payments if agreed upon by all parties. Lawrence should send notices to customers well ahead of the due date to remind them of payment. Accounts delinquent after 45 days are subject to suspension and those that exceed 90 days will be forwarded to a collection agency.

Lawrence faces a risk in implementing preauthorized checks and electronic payments. Mayo may not agree to convert to a different system. In addition, an aggressive attempt to implement the EFT could cause a rift in business relations. To minimize this risk, Lawrence could communicate early on with customers and vendors about their intention to switch systems and provide an explanation of the numerous benefits of implementing an electronic payment system

Accounts Receivable Factoring System

Mayo accounts for 95% of the company's annual sales. Lawrence's credit terms with the Mayo Stores are 20% collection when ordering and 80% the following week. By supplying merchandise to Mayo Stores on credit terms, Lawrence Sports creates accounts receivable. In trade credit relationship both parities to the transaction must be able to lower the cost or risk of doing business. Although Mayo accounts for 95% of Lawrence's sales, the organization defaulted on 80% of it outstanding payments during the week of March 17-March 23 and warned Lawrence that no further payments will be made until the week of April 14-April 20. The organization manages cash flow problems by borrowing with heavy interest burdens against its line of credit and possibly jeopardizing its credit standing with its trade creditors by deferring payments. Lawrence's cash positioning problem exists because of its unstructured credit policy. A new credit policy with Mayo would be the most efficient way to sustain cash flow. Based on the scenario, attempts to pressure Mayo to pay upset the retailer and lowered sales.

Factoring