Lawrence Sports Working Capital Alternatives

Lawrence Sports

Working Capital Alternatives and Recommendations: The Case of the Lawrence Sports Simulation

Lawrence Sports is a sporting goods manufacturer and distributor that focuses on producing equipment for baseball, football, basketball, and volleyball (University of Phoenix 2009). Though the company has remained highly profitable and is a major success story in its industry of operation, it also has certain cash flow issues that must be managed in a proactive manner in order to ensure that the company continues to have working capital for its day-to-day operations. The sales of Lawrence Sports' equipment through Mayo Stores accounts for ninety-five percent of the sales and profits for the company, yet this retail chain consistently pays only twenty-percent of its bills at the time of delivery, with eighty-percent left outstanding. This can create serious cash flow problems for Lawrence Sports, and a method for adequately adjusting to these facts must be achieved.

Working Capital Alternatives

There are several different options that Lawrence Sports has when it comes to fixing this cash flow problem. The first option, which is at once the simplest and the least attractive for the company's bottom line, would be for Lawrence Sports to open a line of credit to allow them to continue operations without placing any strain on their relationship with their primary customer. This would cost the company a potentially considerable amount in interest, however, and while solving the working capital problem would decrease long-term profitability.

A second alternative that Lawrence Sports could consider for solving its working capital situation would be to simply realign its cash management controls and procedures, ensuring that debts and expenditures do not exceed the actual intake of cash by the company. While this situation is often the ideal for businesses, it is not always practical and would create major operational difficulties for Lawrence Sports, limiting its ability to purchase supplies and thus to produce necessary amounts of goods to remain profitable. This is why the third option for working capital management is the recommended method: Lawrence Sports should charge a premium for post-delivery payments, representing payment-on-delivery as a discounted price to its retailers (including Mayo Stores). This would both encourage payment-on-delivery as well as producing greater amounts of cash availability from delayed payments that can be carried over to cover future operating expenses.

Recommendation Implementation

The implementation plan for the recommended changes to the working capital management system in place at Lawrence Sports will be relatively straightforward. The true operating cost needs in order to maintain current production levels will be determined, and the current twenty-percent payment on delivery that the company receives from Mayo Stores will be used as a base line. The extra fees for payment-after-delivery will be a percentage of the unpaid amount that, when added to the twenty percent payment received initially, will cover one week's operating expenses. Payments arriving after delivery will thus continue to provide adequate cash flow to eliminate any interruption in production or distribution.

As with any major change to the cash flow and working capital management system of any business, there are some risks involved with this plan. There is a distinct possibility that Mayo Stores will react negatively to what will essentially amount to a price increase for their carrying of Lawrence Sports' products, with reduced orders that will cut into the manufacturer's profit margin. Lower sales will mean a reduced cash flow for the manufacturer. This is the primary risk associated with this plan, and the only likely negative consequence that could result from increasing the cost of after-delivery payments. As this is essentially charging interest on a debt, however, it is hoped that this plan will be viewed fairly by retailers.

Contingency plans are essential for business owners and managers whenever major changes to operations or financing plans are made, and adjustments such as the proposed recommendation for amending the working capital management at Lawrence Sports are no exception (Bush 2010). In the event that Mayo Stores refuses to the terms created by Lawrence Sports under this new working capital management plan, Lawrence Sports would have very little ability to demand compliance as their success is wholly dependent upon sales at Mayo Stores. To counter this dependence, Lawrence Sports should create a three to six-month grace period before the price changes go into effect and increase marketing efforts to other retailers during this period. This will give the Lawrence Sports advance notice of any problems that might arise in implementing this plan as well as reducing its exposure to the Mayo Stores retail outlets, allowing for greater latitude in capital management.

In order to determine whether the new working capital management plan is working for the company, certain performance measures will be put into place. A dedicated individual in the accounts receivable department can track the changes in revenue that are created by the plan will be able to determine how the incoming cash flow compares to that which existed prior to the implementation of the working capital management plan, forming an effective means of measuring the success of this plan (Gass 2005). An increase in long-term profitability is not an expected result of the implementation of this plan, but operating capital should noticeably increase within a month after the changes take effect.

Taking all of the above into account, the implementation of the recommended changes to the working capital management plan at Lawrence Sports will take place as follows: the necessary amount of additional charges for payment-after-delivery will be calculated, and assessed as a percentage of the total amount left unpaid at the time of delivery. Mayo Stores and other retail customers of Lawrence Sports will be apprised of the impending changes, with a three to six-month period intervening between notification of the changes and their taking effect. Once the changes take effect, the point person in accounts receivable will monitor the change in cash flow resulting from increased prices for payment-after-delivery and from the expected increase in payment-upon-delivery that will be the result of the effective discounted rate of such payments. Ongoing assessment of the plan will potentially lead to adjustments to create the most favorable position for Lawrence Sports and its customers.