October 4, 2011
Professor Donald Branche
Lawrence Sports Simulation
Background and Introduction Working capital management ensures a company has sufficient cash flows to meet short-term debt and operating expenses (Ehow, 2011). Companies must understand the importance of working capital management and how it affects daily operations. One of the most important features of working capital is the ability to plan a company’s cash flow. Working capital gives investors a good idea of a company’s operational efficiency (Ehow, 2011). Also implementing an effective working capital management system is a good way for companies to improve their earnings. This paper will outline a working capital policy and recommendations for Lawrence Sports. Sporting goods retailers continue to benefit from their ability to offer consumer specific brands and specialized services. Products are sourced from sporting goods manufacturers and wholesalers then sold at retail stores. Lawrence Sports is a $20 million company that produces and distributes protective equipment for football, baseball, volleyball, and basketball. Currently, Lawrence Sports has two business partners Murray Leather Works (Murray) and Gartner Products (Gartner). Murray is a company with $10 million in revenue and manufactures semi-finished leather goods with 75% of their sales dedicated to Lawrence Sports products. Gartner has $200 million in revenue and controls 37% of the market. Gartner products range from woodworking products, uniform fabric, and leather. Gartner supplies Lawrence Sports with 70% of the raw materials needed to manufacture their products. One principal customer of Lawrence Sports is Mayo Sports (Mayo), which is one of the world’s leading sporting goods retailers contributing 95% of their sales for Lawrence Sports. Mayo has nearly 3,000 stores inclusive of discount and super stores operating in the United States, Canada, Europe, and South America.
Alternative Working Capital Policies
The goal of working capital management is to operate a firm as efficiently and profitably as possible. Lawrence Sports wants to keep bank borrowing and interest rates low by managing the firm’s short-term assets and liabilities. Lawrence’s managers need to negotiate short-term payment and collection arrangements with their business partners to maintain good relationships and cater to working capital needs. The way a company finances its working capital policies is through one of three philosophies: maturity-matching approach, conservative approach, or aggressive approach (Emery, Finnerty, & Stowe, 2007, p. 640, para. 3).
The maturity-matching approach matches the maturities of its assets and liabilities. This approach assumes that funds will always be available and that cost will not rise dramatically (Emery, Finnerty, & Stowe, 2007, p.641, para.2). The conservative approach uses more long-term and less-short term financing. This approach allows a firm to invest excess funds into marketable securities. The firm can build a margin of safety by financing a portion of its seasonal needs for funds on a long-term basis when using the conservative approach (Emery, Finnerty, & Stowe, 2007, p.642, para. 2).“The aggressive approach uses less long-term and more short-term financing with a goal to raise profitability” (Emery, Finnerty, & Stowe, 2007, p.642, para. 3).This approach is used when a firm expects a decline in interest rates.
The bank that Lawrence Sports’ has a line of credit with increases its interest rate when there is an increase in the borrowing amount. When Lawrence Sports’ principal customer defaulted on their outstanding payments, Lawrence was forced to borrow from the bank causing their outstanding…