Essay Working Capital and Lawrence Sports

Submitted By kspalds
Words: 1748
Pages: 7

Lawrence Sports: Determination of Working Capital Policy Linda Imai-Dixon, Melissa Matthews, Karen Snow, Kevin Spalding, & Mary Spikes
University of Phoenix: Corporate Finance FIN/571
January 27, 2013
Course Facilitator: Troy Mahone

Lawrence Sports is a multi-million dollar company that prides itself on its ability to manufacture and distribute quality sports equipment and protective gear. Their principal Customer, Mayo Corporation, has recently requested a repayment extension on their loan with the company. Mayo would like to pay 80% of the payments due for the weeks of March 17-23 and March 24-30 and no payments would be made prior to April 14-20. To allow this payment arrangement, Lawrence Sports would have a deficit cash position for the weeks of March 31-April 6, where they would have to take an additional loan to cover the $307,000 deficit. Additionally, they would incur an interest payment of $3,150 on the loan. For the week of April 7-13, a loan would have to be made to cover the $411,000 deficit with an additional interest payment of $3,690. Lawrence Corporation has already reached their $1.2 million credit limit level and they would, according to company policy, be unable to make additional loans.
Lawrence Corporation greatly values the business relationship with Mayo Corp, and a decision must be made determining whether to allow a repayment extension based on the terms Mayo has stated, or come up with an acceptable plan, not only for Mayo Corp, but a plan that would be agreeable with all the parties involved. Allowing any extension on repayments from Mayo Corp would affect Lawrence’s ability to make timely payments to other business partners at Gartner Partners and Murray Leather Works.
In the following paragraphs, Team C reviews three working capital plans to determine which plan will reduce risk to Lawrence Corporation. After reviewing each working capital plan, and their contingencies, the team will then determine which plan best resolves each parties’ concerns.
Working Capital Policy 1
The first working capital policy caters to the suppliers while putting off repaying the bank loans as long as possible. This would be the maturity matching approach and it would put a limit on funds that could be available to the business creating a negative working capital position. However, this policy would not work because it leaves negative cash balances and renders Lawrence Sports unable to meet its future financial obligations. Additionally, Lawrence Sports is unable to manage its business proposals. This policy would create a financial burden and strain for the company as well as its business partners, Mayo, Gartner, and Murray. Thus, Lawrence’s working capital position would be hindered.
The key here is to determine the best policy to implement that would not annoy or offend the business partners, but would pay down as much of Lawrence Sport’s existing outstanding debt as possible. We have to strike a balance between satisfactory performance for Lawrence’s working capital and maintaining positive relationships with our business partners.
Working Capital Policy 2 The second working capital policy is not completely catering to the suppliers while paying down the bank loans in a reasonable amount of time. This policy allows Lawrence Sports to handle the day-to-day cash of the company to; balance collections, pay debts, disbursements, future revenues, and borrowing and loan repayment, simultaneously. Good cash management is the backbone of every wel run organization while top management gets the time and peace of mind to concentrate on long term strategic planning. Working capital management is a vital process for running a business. This option allows Lawrence Sports to work with Mayo, their principal customer, and Gartner and Murray, their business partners. They must do what is best for their cash flow and determine what actions work best for all parties involved.…