Lawrence Sports Simulation

University of Phoenix
FIN/571
Professor Helen Horton-Brown
June 25, 2012

Lawrence Sports Simulation Lawrence Sports is both a distributor and manufacturer of sports equipment and protective gear. Because of the company’s size and industry, it is critical for Lawrence Sports (LS) to integrate an effective cash budget to become less reliant on short-term financing. Cash budgeting is an integral component for effective capital working policy (Emery, Finnerty, & Stowe, 2007). Establishing a cash budget is a means to observe a company’s inflow and outflow of cash, which in turn, will assist in adequate forecasting and planning, especially concerning when it comes to short-term credit (Emery et al, 2007). A high-quality working capital policy would also free up cash, which may be allocated to strategic areas for the company’s growth. LS must cease from financing shortages through credit lines with heavy reliance on selling inventory and receiving prompt payments. To understand the changes needed, a review of LS current policy will be analyzed and alternative working capital policies will be compared. Recommendations will be represented regarding which policy LS should implement. Alternative working capital policies The first alternative working capital policy is for LS to negotiate better collection on sales terms with Mayo Stores. The initial arrangement is to receive 20% collection on sales in the first week and 80% in the following week (University of Phoenix, 2012). The collection arrangement needs to be negotiated to 40% collection on sales in the first week and 60% in the following week. As an additional incentive, customers will receive 1% off their entire purchase if paid in full by the end of business on the seventh day. The second alternative working capital policy is for LS to negotiate payment terms with the vendors Gartner and Mayo. Initial arrangement with Gartner is to pay 40% payment on purchase and the remaining 60% in the next week (University of Phoenix, 2012). The term with Murray is to pay 15% payment on purchase and the remaining 85% in the next week. Gartner and Murray supplier payments need to be negotiated and stretched to net 30-day payments after the receipt of goods. The third alternative working capital policy is for LS to increase the working capital needs by borrowing more and increasing the line of credit at Central Bank. Additional interest costs will reflect in the increase of prices that LS charges Mayo on sales. Among the alternatives of working capital policies, the recommendation for LS is to apply both the first and second policies. These recommendations will aid LS in reducing time gaps between cash inflows and outflows.
Plan Implementation LS will act quickly on implementing recommended strategies that are critical to success. The finance team needs to meet with the operations and production team to determine the alternatives available to supply the raw goods required for production. This will give the supply chain and purchasing manager the power to shop for the best price and set terms for receiving goods that benefit LS. The finance team will have the opportunity to set payment terms with various suppliers to help control cash flow. The finance team will meet creditors to negotiate terms for short-term and long-term loans. The finance manager will review the terms weekly to negotiate more favorable rates on short-term loans. To avoid cash flow problems with Mayo Sports, LS will develop contracts that establish costs associated with purchased products. Rebates will be given to Mayo Sports based on volume when payments are made on time. To encourage more cash flow, LS will recruit new resellers to expand the customer base. This will develop predictability in cash flow and allow the company to build cash reserves. The timeline to complete these changes will involve an implementation period of six months. Within 60 days, creditor negotiations will occur. Within 180 days, new suppliers and resellers development will occur. Within 30 days, notifications to all parties of changes in terms and business practices will occur. This will allow each company time to prepare and make changes within their business. This will drive a strategy that is beneficial for both Lawrence Sports and its partners.
Cash Conversion Cycle "The cash conversion cycle is the length of time between the payment of accounts payable and the receipt of cash from accounts receivable" (Emery et al, p. 643). Receiving credit allows LS a window of time to collect payments from its own customers, before their own payments are due to the suppliers. LS finds itself in this undesirable position. Currently, LS holds a seven-day line of credit with its suppliers and extends a seven-day line of credit to its customers (University of Phoenix, 2012), causing cash flow problems for the company. On a monthly basis LS borrows funds from the bank to finance additional operational expenses. Dependence on short-term financing indicates that the cash conversion cycle is too long and less than desirable (Emery et al, 2007). LS needs to implement changes to their credit policies with their customers and negotiate better credit terms with suppliers; LS could spread out payments on accounts payable and increase cash flow to accounts receivable. This option would provide a shorter cash conversion cycle allowing Lawrence Sports to reduce its short-term debt while reducing interest and long-term debt obligations. A successful working capital policy for LS will ensure adequate liquid assets to finance operations. Debt and cash flow will also be managed upon implementation of the alternative working capital policy along with business measures of reducing future complications (Emery et al, 2007). Risks

Developing contracts that establish costs associated with purchased products will reduce risk for the proposed recommendation. Better collection terms and payment schedules will lead to smoother cash flows for LS and its partners. Positive cash flows position LS well to weather unforeseen emergencies. The precautionary demand of the cash management will ensure a margin of safety to meet unexpected needs. The credit established for LS imposes the five features of credit worthiness (character, capacity, capital, collateral and conditions). This alone will prove that the risk potential for Lawrence is kept to a minimum. Should any risks arise; a mitigation plan will be set in place to maintain good cash management and corporate financial management.

To mitigate risk, LS will maintain a compensating balance account. This provides indirect payment to the bank for its loans and other services. Additionally, the risk management team will recognize and mitigate risks through employee training, and strong corporate governance through reporting to external stakeholders on the framework, strategy, process and effectiveness of the risk mitigation plan, ensuring the timely resolution of risk.

LS possess the one goal of any other organization, which is management making viable day to day decisions as it is a critical requirement to operating a business that is successful and allow for stockholder wealth to maximize. To ensure the recommendations for improving LS capital policies and reduce future risk are implemented properly, the best performance measures for the project will be necessary. Performance measures assist management with making sound decisions while utilizing the information they have available. According to Oak Ridge Associated Universities, (2005); “A performance measure is composed of a number and a unit of measure. The number gives us a magnitude (how much) and the unit gives the number a meaning (what). Performance measures are always tied to a goal or an objective (the target). Process measurements that are most significant include forecasting and operations. This type of process measurement will help ensure the recommendation for implementation are monitored and evaluated for their expected success. The process of forecasting and operations is often times associated as continuous improvement, which is coupled with the total quality management (TQM) concept. The utilization of both forecasting and operations as process measures for decreasing risk should allow LS to improve its cash flow position.
Implementation Contingencies With a number of risks, and variables in changing working capital and credit policies, implementation of those policies may encounter difficult transitions and ultimate failure. A change in working capital and credit policies may cause changes in sales, the cost of goods sold, bad debt expenses, and carrying costs on accounts receivable. Many issues that arise from the change in policy can be anticipated, but for those changes that cannot be anticipated, contingency plans must be considered. With carefully planned, and executed changes in polices, contingencies plan are unlikely to be needed, but will prevent significant losses or disruption to operations. Although LS is its changing polices, those changes will affect partner businesses, not always in beneficial ways. In particular, the relationship with Mayo Stores, who represent 95% of sales, will be strained at best, permanently damaged at worst. Carefully cultivating the relationship by clearly communicating the purpose and intention of policy changes will bring Mayo into the changes as respected partners. With the relationship securely managed and maintained, Mayo will have a higher tolerance for the negative consequences associated with the change in working capital and credit policy. If the change to working capital and credit polices fail resolve the cash flow, inventory and supply issues, more drastic measures may be necessary to avoid losses; significant changes to business operations may be required. The best option available is Just in Time inventory management, which reduces raw material, work-in-process, and finished product inventories. With JIT, materials arrive just as they are needed; producing only products which are needed to fill orders. JIT uses precise planning and coordination, and also requires high setup costs, and strong supplier and vendor relationships.
Conclusions
LS understands that implementing an effective working capital management system is a way for their business to improve their earnings. The changes to working capital policies will ensure that LS have sufficient cash flow to meet its short-term debt obligations and operating expenses. Having the ability to change its professional policy into positive net worth is a goal LS is eager to achieve. Learning from its past mistakes will be used as an example of how important the cash flow responsibility is to their business. Successful cash balances and new growth opportunities are sure to reflect on future balance sheets and bottom lines of Lawrence Sports.

References
Emery, D. R., Finnerty, J.D., & Stowe, J. D. (2007). Corporate financial management (3rd ed.). New Jersey: Pearson-Prentice Hall.
Oak Ridge Associated Universities. (2005). Retrieved from http://www.orau.gov/pbm/documents/overview/wapm.html
University of Phoenix. (2012). The Lawrence Sports Simulation. Retrieved from University of Phoenix, Simulation, FIN/571 website.