Alternative Working Capital Policies for Lawrence Sports

Alternative Working Capital Policies for Lawrence Sports

Introduction

Various financial policies in a business outline the health status of the business and current and future investments of the company. Working capital policy allows for investments and operations to occur and varies with the current economic status of the company. The working capital is composed of short term assets such as cash, inventories, and accounts receivable which exceeds the short-term liabilities. Managing these short-term assets becomes crucial to avoid financial difficulties; excess cash should be set aside and available for withdrawal at needed times. Account receivable is essential in working capital, especially when large numbers of sales are on credit. Excess inventory will create unnecessary uses of funds that reduce cash and contribute to less liquidity of your working capital. Keeping working capital low will allow money to be used for profitable investment opportunities and or reimburse loans. Various working capital policies are described below to decrease Lawrence Sports must implement to reduce future difficulties.

Lawrence Sports Recommendations and Risk

Lawrence Sports is a $20 million revenue company that manufactures and distributes equipment and protective gear for baseball, football, basketball, and volleyball. Mayo Stores are Lawrence’s principal customer while Lawrence sources all its material from Gartner Products and Murray Leather Works. Three alternatives and the risk associated with each allows for reduction of future difficulties for Lawrence Sports. Having an extended credit term will allow for Lawrence Sports to collect from their principal customer and repay the suppliers, Murray and Gartner. This could upset the suppliers and discontinue their professional relationship. As a second option to avoid future difficulties, Lawrence could increase the price of goods they sell to Mayo. Increase in price could potentially increase the collection period from Mayo - if there is currently a collection period, increase in price of goods will further hurt Lawrence Sports. Third option is to ask for full payment from Mayo at time of delivery. This ensures payment is received for goods sold. Though given Mayo is the number one source of cash flow for Lawrence Sports, such request could result in Mayo stopping all purchases.

Contingencies for the recommendation

Even though conventional wisdom claims payment upon receipt is the best policy often this is impossible. This is the case with Lawrence Sports. With these pressures not only on Lawrence, but also the suppliers, in this case Murray and Gartner, there is almost a certainty that a delay in payments will be met with some resistance. Recently, a relatively new financial instrument became available called Supply Chain