Alternative Working Capital Policies for Lawrence Sports

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Introduction

Working capital management is a very delicate and risky thing to do. A manager has to deal with the daily cash of its company and needs to balance things like collections, disbursements, future events, borrowing, bad debts and loan repayment all at the same time. The situation with the financial manager of Lawrence Sports is in is a very delicate one. Due to the payment deferring of its business partners, the company has found itself to be borrowing outstanding sums from the Central Bank. During the end of March and beginning of April, it had to borrow the max amount permitted, $1.2 million, at the highest interest rate of 16%. In order to keep the financial stability of the company intact, the finance manager has to collect payments as soon as it can and also negotiate to defer its payments within a reasonable period of time. This way they will have the necessary cash flow to begin repaying the bank debt and not take future loans that would result in financial disaster for Lawrence Sports. It also should be careful not to stretch the relationship with its business partners.

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Alternative 1

The first alternative is to fully accept the requests of the business partners and continue for the month of April with bank borrowing. This means allowing Mayo until the week of April 14-21 to collect all outstanding receivables. At the same time with Gartner and Murray continue the existing arrangements. With Gartner make 40% of the payment on a purchase and the remaining 60% the next week. With Murray make 15% of the payment immediately on purchase and the rest in the following week.

The problem with this alternative is that it will make it impossible to continue this way for the future starting from the following month. Due to the unbearable loan from the bank, Lawrence will still have to change its mode of collecting payments because it needs income to repay the debt. It will need even more than this month. This means that it will have to stretch with its business partners with harsher demands and it could result even in agreement failure for both sides. It is a too risky alternative to pursuit.

Alternative 2

The second alternative is to completely change the relationship with the business partners and stretch them according to the needs of Lawrence sport. This means to take a short decision of deferring all payments to Murray until the week of April 14-21, take a tough stance on Gartner by paying 40% on purchase, 20% in two weeks and the rest the following week, and request from Mayo to complete all payments in the first week of April. This alternative is very comfortable to Lawrence Sports since it will have an extremely positive closing cash balance. More exactly this closing cash balance will be more than $600 thousand per week for the first three weeks of April. That will resolve the debt issue with the bank immediately. The problem is that the company will enter into a crisis relationship with its business partners. It can cause serious financial problems to Mayo and especially Murray. At the same time, it can spark a negative reaction from Gartner which has the position of implementing sanctions against our company since we are not its biggest customers. For example, it can decide to delay any shipment of materials until payments are made. That will result in disaster for the future of Lawrence Sports.

Alternative 3

The third alternative would be to find a middle way with the business partner’s requests and the company’s needs in order to both keep a positive relationship with them and safeguard the financial future of Lawrence. Let’s start with the relationship with Murray. It is the more obliging of the two vendors to Lawrence and it will understand a delayed payment with the promise of business returning as usual after the bad financial situation. Of course, we should not stress too much because it could result in a boomerang effect and harm the financial conditions of Murray which in turn will harm our own (Wachowics & Van Horne, 2005). We can offer Murray to pay 15% the first week of April, 40% the next week and the rest the following.

Next attention should turn to the biggest customer. Since Mayo is the premium customer, we can allow an extra week for paying 80% of the sales for three weeks of March. This will enable them to have some time on balancing their finances. Even though not completely fulfilling the request of delay until the second week of April, still we must not forget that Mayo is one of the biggest retailers in the US and Canada as well as expanding overseas so will be able to find the resources after that week of deferment.

Finally, with Gartner, it would be better to continue the existing arrangement. As mentioned above, we do not have the ‘first voice’ as its premium customer thus it will harm more us to tension the relationships than them. This is important because keeping excellent relationships with the supplier’s companies can assure their future (Mullins et al, 2008).

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References

Mullins, J. W., Walker, Jr., O. C., & Boyd, H. W. (2008). Marketing management: A strategic decision making approach (6h ed.). Boston: McGraw-Hill Irwin.

Wachowics, J. & Van Horne, J. (2005). Fundamentals of financial management (12th edition). Edinburgh: Pearson Education.

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BusinessEssay. (2022, February 21). Alternative Working Capital Policies for Lawrence Sports. Retrieved from https://business-essay.com/alternative-working-capital-policies-for-lawrence-sports/

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BusinessEssay. (2022) 'Alternative Working Capital Policies for Lawrence Sports'. 21 February.

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BusinessEssay. 2022. "Alternative Working Capital Policies for Lawrence Sports." February 21, 2022. https://business-essay.com/alternative-working-capital-policies-for-lawrence-sports/.

1. BusinessEssay. "Alternative Working Capital Policies for Lawrence Sports." February 21, 2022. https://business-essay.com/alternative-working-capital-policies-for-lawrence-sports/.


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BusinessEssay. "Alternative Working Capital Policies for Lawrence Sports." February 21, 2022. https://business-essay.com/alternative-working-capital-policies-for-lawrence-sports/.