This would considerably simplify matters for Lawrence Sports. Such financing methods are best suited for alimenting short-term objectives.
The reason behind implementing an electronic payments system relies on the fact that the company would count on receiving and making timely payments. This alternative is also designed for simplifying the cash flow.
Preparing and effective cash budget is another alternative solution that must be taken into consideration by the company's managers. The reason that sustains this alternative consists in the fact that companies prefer not to keep big amounts of cash available, but, at the same time, companies are also afraid of keeping amounts of money that are too small for whatever unexpected issues might emerge. Handling large inventories of cash is a strategy that his its advantages and its disadvantages (Brealy, Myers & Allen, 2005).
Another alternative solution mentioned above consists in implementing a factoring system. This financial tool is usually used in order to raise capital and ensure a flexible cash flow. As a consequence, implementing factoring would help the company to reduce its internal costs and to allocate money for certain activities where it is needed.
Analysis of Alternative Solutions
If a situation presents only a single alternative solution, it is easy to implement. But when dealing with multiple solutions, it is necessary to conduct an analysis on each of these alternatives. The reason behind the analysis consists in discovering the advantages and disadvantages of the alternatives. It is usually recommended to select the alternative solution that is able to provide the biggest advantages or the lowest risks in the given circumstances.
This alternative would be able to help Lawrence Sports in its necessity to ensure availability of a suitable line of credit. This method is very suitable for the company's situation. Short-term financing would allow for more space of movement for Lawrence Sports because the company would not be tied to large credits on medium term or long-term. In addition to this, the company would be able to pay its suppliers in due time. This would further influence relationships with the company's suppliers in a positive way. The company would prove its reliability.
Electronic payments system implementation
This alternative has similar effects with the previous one, although the method is entirely different and it implicates different aspects. Basically, by implementing such a system, Lawrence Sports would not have to worry about delayed payments, no matter whether they are received or made.
Implementing a suitable cash budget strategy
This is the highest rated alternative solution in accordance with Lawrence Sports' situation and the objectives the company want to reach. Such a strategy is designed to point out the areas of the business that require cash and what the amount of needed cash would be.
This alternative solution is designed to allow Lawrence Sports to raise the capital that the company's activity requires for further sustainability. It would also help the cash flow to be more flexible, especially in the circumstances the company finds itself in.
Risk Assessment and Mitigation Techniques
As mentioned above, all the alternative solutions bring advantages, but they also bring their share of risk. Some of them are riskier, but more efficient, while other may be more secure, but they do not present great advantages that the company could benefit from on the medium term or long-term. In other words the higher the risks, the greater the benefits.
Each company is free to make whatever choice its managers believe to be the best in the given circumstances. In Lawrence Sports' case, the company has a strong enough position on the market to allow for a riskier solution choice. The risks associated with each alternative solution are detailed in the following paragraphs.
This is considered as a very risky alternative. Before implementing such an alternative, the company's managers must carefully plan the company's financial situation. Given the short terms involved, the company must be very aware from the beginning whether it definitely has the possibility of paying the loans back in less than one year, in the best case. Without such a thorough analysis, the company might later find itself in the impossibility of paying back the loans. This would only make the company's financial situation a lot worse than it was in the beginning.
The implementation of electronic payments system
Basically, even if the company implements such a system for electronic payments, there is the risk that its customers and suppliers will not want to adhere to such a system. In this case, the company cannot force them to follow this direction. Therefore, it is recommended to discuss the matter with the customers and suppliers in order to find out whether or not they would be interested in such a payment system. It is recommended to have these negotiations before the system is implemented, so that the company's money is not wasted on it in case Lawrence Sports' partners refuse to use it.
Implementing a cash budget strategy
This is also a very risky alternative solution. This solution would allow the financial department managers to observe how and where the money was used. This means they would have the possibility to observe where the money was used in a wrong manner. Given the importance of such situations, employees responsible for these errors might have to suffer the consequences. However, this would be a very good strategy for the company.
The most important risk associated with the implementation of factoring consists in deteriorating the business relationships that the company has with its customers and suppliers. In other words, Mayo would be practically forced to pay Lawrence Sports' sooner that established before. It is more than likely that Mayo would not be comfortable in this situation, given the fact that Mayo cannot pay on time even as it is now. In the worst case scenario, Mayo would be determined to close its relationship with Lawrence Sports. Given the fact that Mayo is the most important customer for the company, such a situation could prove to be disastrous for the company.
The proposed alternative solutions were: short-term financing, implementing an electronic payments system, implementing a cash budgeting strategy, and factoring. Of these alternatives, the optimal solution is considered to consist in implementing a cash budgeting strategy.
Although this option presents its share of risks, it is considered that the benefits brought by implementing a cash budgeting strategy will significantly counteract any possible risks. The greatest advantage of this strategy consists in the fact that it is a long-term strategy. It does not just patch problems for the moment. If development and implemented properly, such a strategy will prove very efficient for the years to come.
Even more, the company will be aware of all times of its financial situation. As a consequence, Lawrence Sports will be able to make previsions on how the company will evolve over the next period of time. Based on such previsions, the company will be able to correctly estimate any necessities that are likely to emerge in the future. This way, the company can plan on expanding its activity, on expanding its geographical area, on developing its range of products, on creating a larger customer base, and on developing a new pricing strategy.
The first thing that Lawrence Sports is forced to do consists in resolving its issues with the bank, paying back the loan, and collecting the money Mayo owes the company. It is important that the company settles its financial issues. This way, the company's financial situation will be a stable one, at least for the moment. This will allow for the implementation of the strategy detailed above. This should not exceed 3 months. The people in charge are represented by the managers and the company's owners.
Next, the company should secure its financial status through short-term loans. This will ensure the well-functioning of the company's activity over the next period of time. The estimated time is one month. The people responsible are the financial director and the general manager.
The most difficult stage of the implementation plan consists in actually developing the cash budget that the company will use in the future. The estimated time is 3 months. The people in charge are part of the financial department, together with the financial manager.
Evaluation of Results
Any strategy is practically worthless unless it is evaluated, monitored over time, in order to adapt the strategy's parameters to any modifications of the internal or external environment. The company must research the market conditions in order to establish whether these conditions allow for the strategy that the company aims at implementing.
Based on these findings, the company must determine the specific results estimated to be achieved by the implementation of the cash budgeting strategy. The company must further monitor the financial situation in order to observe whether the results were achieved or not.