International Corporate Finance/Fin Gm571 Week 3
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Lawrence Sports Simulation
Team
International Corporate Finance/FIN GM571
Alternative Working Capital Policies to Consider
The short-term financing strategy Lawrence Sports (LS) is not efficacious. It is in need of improvement and is a problem that LS must consider an alternative working capital policy. The current policy places LS in an overly dependent financial position on the company’s primary customer, Mayo Stores. When Mayo Stores, who composed 95% of annual sales, does not make a payment to the credit terms of 20% upon purchase and 80% the following week, this produces a negative domino effect on LS. The situation leaves them incapable of paying its own suppliers and operating costs, and resorting to a costly line of credit from bank and potentially leading LS into bankruptcy (University of Phoenix, 2010). Such a method indicates that Lawrence Sports has an imbalance between working capital inflows and outflows. Therefore, LS must create and maintain a cash budget to manage assets more efficiently, allowing a resource minimally to pay bills, granting themselves a buffer in which to receive late payments, and thus reducing reliance upon short-term financing.
A second working capital alternative for LS to consider is negotiating an increase of trade credit with the company’s primary supplier Murray Leather Works to who earn 75% of sales from LS in terms of allowed credit amount, collection policy, and discount periods.
The current credit terms dictates 15% upon purchase and 85% the following week (Emery, Finnerty, & Stowe, 2007). As valuable a customer who LS is to Murray, LS can negotiate extensions of 30 or 60 days credit from Murray. In addition, Lawrence Sports can also discuss such terms with Gartner, who sources 75% of the business’ raw material. However, because LS does not have excessive bargaining power with Gartner’s 37% market control, the company may find it beneficial to seek out another alternate supplier who controls the...
Team
International Corporate Finance/FIN GM571
Alternative Working Capital Policies to Consider
The short-term financing strategy Lawrence Sports (LS) is not efficacious. It is in need of improvement and is a problem that LS must consider an alternative working capital policy. The current policy places LS in an overly dependent financial position on the company’s primary customer, Mayo Stores. When Mayo Stores, who composed 95% of annual sales, does not make a payment to the credit terms of 20% upon purchase and 80% the following week, this produces a negative domino effect on LS. The situation leaves them incapable of paying its own suppliers and operating costs, and resorting to a costly line of credit from bank and potentially leading LS into bankruptcy (University of Phoenix, 2010). Such a method indicates that Lawrence Sports has an imbalance between working capital inflows and outflows. Therefore, LS must create and maintain a cash budget to manage assets more efficiently, allowing a resource minimally to pay bills, granting themselves a buffer in which to receive late payments, and thus reducing reliance upon short-term financing.
A second working capital alternative for LS to consider is negotiating an increase of trade credit with the company’s primary supplier Murray Leather Works to who earn 75% of sales from LS in terms of allowed credit amount, collection policy, and discount periods.
The current credit terms dictates 15% upon purchase and 85% the following week (Emery, Finnerty, & Stowe, 2007). As valuable a customer who LS is to Murray, LS can negotiate extensions of 30 or 60 days credit from Murray. In addition, Lawrence Sports can also discuss such terms with Gartner, who sources 75% of the business’ raw material. However, because LS does not have excessive bargaining power with Gartner’s 37% market control, the company may find it beneficial to seek out another alternate supplier who controls the...