Lawrence Sports Simulation resource and project data

Finance

Lawrence Sports Simulation

Lawrence Sports are facing a challenge; they have a single buyer for their goods and deal with two main suppliers. The firm is facing delays in collecting the accounts receivable from the buyer; Mayo, while the payments for the suppliers; Garner Products and Murray Leather Works remain due. The strategy suggested is to readjust the credit terms with Lawrence and the suppliers to reduce the pressure o the cash flow and decrease the requirement for borrowing. The strategy requires the balancing of the different stakeholders needs in order to retain the good business relationships. The strategy of tightening the credit policy is to be accompanied by the use of the balanced scorecard which will help the firm focus on the overall performance and Cash Conversion Cycle

The cash conversion cycle measures the time between a firm spending cash and collect cash from the sales. The longer the time period the greater the potential need for working capital to support the firm. Generally, lower cash conversion cycle times are seen as favorable. The cash conversion cycle starts with Lawrence Sports purchasing the inputs for the goods they make from Garner Products and Murray Leather Works. The purchases will be on credit, and payment will be due at a point in the future. The goods are then made and shipped to Mayo, the payments to Garner Products and Murray Leather Works are due before the payments are received from Mayo, with Mayo creating further delays. With no action the cash conversion cycle is extending, with Lawrence Sports carrying the cost.

Working Capital Management

Working capital is the amount of money that a firm has tired in their operations, including the inventory (Sagner, 2010). The longer the cash conversion cycle the greater the amount of cash ties up in that inventory. The working capital presents the firm with an opportunity coat, as there is interest attached if there is a need to borrow money and working capital is generally seen as unproductive (Sagner, 2010). There are several strategies Lawrence Sports could adopt in order to improve their working capital management.

The first approach may be to reduce the cash conversion cycle; this could be achieved by either delaying the payments to the suppliers or speeding up the payments from the buyer. If Lawrence delayed the payments to Garner Products and Murray Leather Works, this would provide for greater time to collect the cash from Mayo. However this may be problematic, as delaying payment may not be welcomed by the suppliers, so any changes would need to be negotiated. It may also be argued that delaying payment to their suppliers is effectively moving the problem up the supply stream.