The art of Working Capital Management is like juggling with the cash flow and outflow, in good times and bad. In the Lawrence Sports simulation, the payment and collection periods have been compressed from the standard practice in the US to illustrate the principles of cash management (2007). Reviewing the Lawrence Sports Simulation the authors created capital policies that reduce future difficulties and made recommendation for which policy Lawrence Sports should implement. These recommendations include the following: an evaluation of the risk, contingences, performances measures that are used, and an implementation plan.
In using the conservative approach, Lawrence Sports would alter much of its short-term financing to longer debt obligations. By substituting increasing rates with low fixed rates on long-term financing, this approach could keep interest low. This enables using long-term financing for some of its temporary current assets and for all long-term and permanent current assets. When asset needs are high, short-term financing would be used. When asset needs are low, they could take advantage of the opportunity to apply excess funds into more marketable securities. Since most sports are seasonal, financing a portion of its funds for particular needs on a long-term basis would build more of a safety margin (Emery, Finnerty, & Stowe, 2007).
Maturity Matching Approach
With maturity matching, Lawrence Sports can dodge the risk of defaulting and interest rates, by matching the maturities of its assets and liabilities in the form of $1.2 million bank loans, (Emery, Finnerty, & Stowe, 2007). Lawrence Sports will still have to arbitrate with the suppliers to pay back the burden of the loan and lessen the deficit of cash. No excess funds will be available by using the maturity matching. Although having excess funds would benefit the company more than having no funds, it is not recommended to use the maturity matching approach because the capital will be tied-up for the long-term, making the company less fluid.
Management prefers an aggressive approach to finance working capital to raise profitability (Emery, Finnerty, & Stowe, 2007). All seasonal or temporary needs are financed using short-term funds but the aggressive approach uses long-term funds to finance only the fixed part of current assets. In order to capitalize on the increased profitability provided by aggressive financing, Lawrence Sports will need concrete information and data on cash flow requirements to lessen the need for liquidity. Risk is provoked due to the potential of market fluctuations. The use of short-term loans allows for higher returns but not without added risk (Emery, Finnerty, & Stowe, 2007).
It is recommended that the company implement the conservative approach based on the current policies of Lawrence Sports. This method decreases risk associated with reduced liquidity, increasing interest rates, and economic changes affecting the availability of business loans.
Evaluation of Risk
The optimal solution cannot be deemed successful unless the desired changes is acquired and end stated goals are met. Ongoing processes and metrics must be in place to monitor the success of the optimal solution and capital management policy. Lawrence Sports can evaluate the solutions implemented by applying basic ratios to financial statements. Checking values for debt-to-equity ratios and return on investment ratios can provide a clear picture of whether or not the company building cash reserves and investing cash in a positive manner.
Other metrics include the cash conversion cycle, average collection period and accounts receivable aging. In the events the cash conversion cycle does not get reduced then Lawrence Sports will need to evaluate other areas for improvements such as the time lapse between getting the finished product delivered and the collection cycles. Longer cash conversion cycle creates greater dependencies on short-term financing to pay the bills until money is collected. A shorter cash conversion cycle would indicate the new policies are effective. Average collection period which measures the length of time from invoice issuance to the time Lawrence Sports receives payment. Monitoring the average collection period will reveal if the newly implemented credit and collection policy is effective. Accounts receivable aging summaries will define whether or not receivables are being collected in a timely manner or if further evaluations need to be done.
A contingency plan is a plan developed for a certain situation that bears unforeseen events. Businesses typically have a contingency plan that can save them when unfortunate events hit their field of operation. Plan B also helps in recovering from an unlucky position with minimum time and cost possible as well as providing a safety cushion of enough funds and appropriate amount of time to preserve cash inflows that aid in meeting payment deadlines. A The plan detailed herein contains three solutions that would help Lawrence Sports in this respect.
Lawrence should develop a negotiation plan by sending a shrewd representative to set firm deadlines for Mayo that obligates the latter to make payments on time thus saving on interest payments for the loans obtained by Lawrence.
Financing long term debts that require high interest rates should be avoided in favor of short term ones. The amount involved in such a process, more than 15% versus 10% in interest, can be devoted to other issues within the company such as paying necessary overhead or even lend the money to other business partners and make money out of this lending process.
Reach-out to different partners other than the ones existing who had defaulted several times making advantage of the rapport. Mayo contributes to 95% of Lawrence’s sales, yet fails to make payments on time causing money shortage to their providers. Therefore, extending the arms of Lawrence to different retailers, without damaging the relationship with Mayo, is a step that should be kept within the account of the former as a wise alternative.
Managing liquidity reflects any "firm’s ability to meet its obligations as they come due (Emery, 2007)." It is the art of "Juggling day to day cash of a company" in its endeavor to achieve its highest goals in satisfying business partners in addition to keeping its own financial concerns at the maximum level of balance. Maximization of shareholder wealth is the goal of working capital management, and it involves cash investments, marketable securities, inventories and receivables according to Emery. Lawrence Sports needs to focus on good planning as well as quicker responses (Lawrence simulation, 2007).
Performance Measures for Evaluation
When evaluating working capital policies at Lawrence Sports we must make many considerations. Borrowing money from banks our other companies should be avoided as much as possible. Banks will be hesitant to give money, even to big companies, in an unstable economy. The new policy must also allow the company to collect accounts receivable as much as possible. Stretching the payments due too many weeks or even into the next month could be devastating to our company. If our company has a bad month for making sales we may not have the money to support another company’s debt. We must also be able to be flexible because not allowing a partner such as Mayo Retail Company could be detrimental to Lawrence Sports. If we disturb that relationship we could lose enough business to ruin our company (Lawrence simulation, 2007).
When evaluating the new plan the risk return trade off principles must be considered. For example, allowing a company like Mayo Retail company extra time to pay us account has some risk but is probably worth doing to maintain a valuable relationship. What if they had outstanding payments due for months building up massive debt to Lawrence Sports? We would have to consider not risking future financial trouble with the company in hopes we would have a better working relationship with another company. The new plan must address the Risk-Return principle (Emery, Finnery, & Stowe, 2007).
In order for the new working capital plan to perform effectively it must be versatile. The new plan should have the ability to offer short term financing and long term financing when appropriate. A long-term partner who is trusted may be able to pay our company accounts receivable in a long-term payment plan (Emery, Finnery, & Stowe, 2007). For example if Mayo Retailers is having a period of low sales they may not have the ability to pay the account immediately. The risk of doing something like this would have to be considered. A company must be trusted and have a good history of paying debts to be considered for long-term finance. Short-term collections on accounts should be used whenever possible. Also our company would be well suited to partner with companies that allow us to pay back debts long term if need be. Gartner will not allow us much leverage because we are not major customers of theirs. We may not be able to negotiate long-term payments with them. The new plan should possibly involve a vending partnership with Murray exclusively because involving Gartner may hurt our ability to be versatile (Lawrence simulation, 2007).
When evaluating and measuring the performance of the new recommendation the previously mentioned criteria should be considered. The recommendation should focus on the risk-return principle in some aspect when implemented. Lawrence Sports must be versatile in order to borrow our make payments in a short-term our long-term fashion. Long-term payment plants can be implemented on a limited basis only. They should only be used on trusted partners who have a good history of paying money back to the company. Implementing two long-term plans simultaneously could be troublesome for our business. If Lawrence Sports has a down sales period and low accounts payable it could force the company into a money borrowing situation that puts us in debt. While one long-term payment plan is in action the other partners should be on short-term payment plans. When Lawrence Sports is paying its accounts the company should use a maximum of one long-term payment plan otherwise it is too hard to keep track of finances. The new policy needs to be implemented swiftly but with finesse. Being too aggressive with collecting finances can strain important business relationships (Lawrence simulation, 2007). However, we have to consider the well being of our company. Constant outstanding debts owed by other companies are unacceptable. Lawrence Sports should be able to apply a flexible finance collecting policy but also be able to adapt into a more aggressive approach when necessary.
A manager handling the day-to-day cash of a company also has to balance many things like collections, bad debts, disbursements, future revenues, borrowing, and loan repayment simultaneously (Lawrence simulation, 2007). Hence, working the capital policies will help reduce future difficulties. The authors made recommendations for the following: an evaluation of the risk, contingencies, performance measures and have an implementation plan for the Lawrence Sports Simulation. It requires good planning and quick responses when managing or juggling with cash flows and outflows.