Financial crisis and working capital solutions for Lawrence Sports

¶ … Lawrence Sports is a company that deals with manufacturing and distributing sports equipment. The important thing about the company's situation consists in the financial problems that currently affect Lawrence Sports' activity. If not resolved, these problems will only intensify and may even lead to bankruptcy.

The most important issue for Lawrence Sports is the credit the company has borrowed from a local bank, credit that the company is unable to pay back. This is connected with another debt, a debt owed by the company's most important customer. This debt has created a hole in Lawrence Sports' financial resources. This means that the hole has to be covered with money allocated from other activities. Even if this solves the financial problem, it will lead to other dysfunctional processes in the company's activity, given the fact that certain areas will be deprived of their required resources.

Even so, this will only solve the problem for the moment. But this is not a real problem solution. The paper will provide an optimal solution that best suits Lawrence Sports' situation. The optimal solution presented in the following pages is designed to produce long-term effects, in order to stabilize the company's working capital.

Situation Analysis

Issue and Opportunity Identification

Lawrence Sports is traversing a turmoil period caused by internal and external factors. Each of these factors, which will be discussed in the following paragraphs, has its level of importance in creating the situation Lawrence Sports is in at the moment. Even if each of these issues does not represent an immense problem by itself, it seems that their combination led to the serious situation Lawrence Sports finds itself in.

The issues that created this situation are: use of cash, the balance between collecting and distributing the cash, incurring debt, and debt management.

Lawrence Sports use of cash - although the company's optimal use of cash is an internal matter, in Lawrence Sports' case it had external causes. The situation was created by the fact that Mayo Stores did not pay their debt to Lawrence Sports in due time, causing a lot of financial distress for the company. The situation was further emphasized by the fact that some of the goods that the company delivered seemed to be damaged. This was obviously not anticipated by the company, so this matter could not be counteracted in time. Much like the economic and financial crisis affecting the entire world currently, the detriment produced by Mayo had to be covered by cash initially allocated for other activities. The opportunity that arises here is represented by the fact that the company would be somewhat forced to reassess its cash flow, and, more importantly, its cash allocation.

The risk incurring debt - this issue is considered to have significant negative repercussions for Lawrence Sports. Even more, it is expected that such damages will not be solved by the company, having to deal with their effects for a long time. This could affect the company's activity on medium term or long-term. This means that the company will be forced to adapt to these changes and even to completely modify its strategy in fight for survival. However, opportunities still exist even in this situation. Opportunity here is derived from the fact that the company can implement risk management tools for diminishing the effects produced by this issue.

The balance between collecting and distributing cash - this is an internal factor with external repercussions. Although Mayo owes money to Lawrence Sports, our company also owes money to some if its vendors. These debts are correlated. Once Lawrence Sports receives its debt from Mayo, the company is able to honor its debt to its vendors. If Mayo continues to delay the payment, Lawrence Sports cannot respect its financial agreement with its vendors and pay them the debt. The opportunity here relies on the fact that Lawrence Sports is in the position of developing a negotiation strategy with both parties.

Debt management - this is an external factor. Lawrence Sports also owes money to the bank. The amount has reached a total of p $1.2 million. This is the maximum amount that the company can borrow. This is also the most important debt for the company, debt that must be paid as soon as possible. The opportunity consists in the fact that Lawrence Sports must diminish credit standing problems and increase its debt to income ration.

Stakeholder Perspectives/Ethical Dilemmas

The company's stakeholders include:

Employees

Managers

Owners

Suppliers

Customers

Shareholders

Society

Government

Creditors

The employees, managers and owners represent internal stakeholders, while the suppliers, customers, shareholders, society, government and creditors represent external stakeholders.

Employees are the most important resource that the company possesses. Their responsibility consists in performing the tasks they are assigned by their managers in order to ensure the well-functioning of the company. Their rights are negotiated before the work contracts are signed and cannot be modified by unilateral request of the company. Their interest is to keep their jobs and to receive their salaries in time.

Managers are responsible for running the company, for establishing the general strategy and its sub-strategies, and to ensure that this strategy is correctly implemented. Their interest is to make Lawrence Sports as successful as possible, so that their incomes and prestige will grow in accordance with the company's growth.

The company's owners or the shareholders have the responsibility of financing, financially investing in this company. Their interests consist in profit, performance, and the direction the company tends to follow.

The company's suppliers are an important part of its activity. Their responsibility is to ensure that the company receives the supplies they agreed upon. Their interest consists in building a long-term commercial relationship with the company that would be able to bring them long-term profits.

In Lawrence sports' case the customers are represented by Mayo Stores. Their responsibility consists in ensuring that the company receives their owed amounts of money. Their interest consists in negotiating a price that is as small as possible for Mayo. They are also interested in value and customer care.

The society is represented by the local community in which the company activates. Its interests refer to the jobs created in the respective community, the company's involvement in community problems and other related issues.

The government as a stakeholder is basically interested in the money that the company can contribute with to the budget, consisting in taxation, VAT. The government is also interested in the unemployment rate that can be directly affected by the company.

The company's creditors are very important for Lawrence Sports. In this case, the main creditor is represented by the bank the company has reached to an agreement. Their interest consists in credit scores, agreement upon new contracts, and liquidity.

In this case, conflicting interests may interfere between employees and owners, between the company and the local community, or between the company and its creditors.

Problem Statement

Lawrence Sports' objective consists in establishing itself on the market as one of the leading competitors, maintaining this position, and after an established period of time becoming the leader of the sports equipment market. This will be achieved by implementing an optimal working capital procedure, and by developing a suitable cash budget. The company also aims at increasing profits, creating better relationships between the company's stakeholders, and improving the general financial strategy.

Implementing company factoring

By borrowing through short-term loans, Lawrence Sports gets the money the company requires that is paid back to the bank in level amounts with a single payment at maturity (Brealey, Myers & Allen, 2005). 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.

Short-term financing

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.

Implementing factoring

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.

Short-term financing

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.

Implementing factoring

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.

Optimal Solution

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.

Implementation Plan

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.

In case the desired results are not achieved, the company must investigate the causes that led to such a situation. This probably means that the strategy's parameters were not established correctly in the beginning.

Conclusion

The situation analysis of Lawrence Sports led to interesting findings. Although the company's situation allowed for several options to be implemented, or the combination of these options, the best strategy for Lawrence Sports in the given circumstances consists in a cash budgeting-based strategy.

The reason behind this clear recommendation consists in the fact that a strategy based on cash budgeting is very useful for medium term or long-term. The strategy is estimated to produce effects for a longer period of time, not just for the moment. The strategy is recommended as the best solution for improving the company's working capital and for preventing any negative situations like the credit that Lawrence Sports has borrowed from the bank.