Lawrence Sports Simulation

FIN/571 Corporate Finance
Prof. Ricardo Rivera Matos
May 29, 2012
University of Phoenix * Lawrence Sports Simulation * The process of taking risks will define if a company will emerge from a financial situation. The business relationships will suffer, but if the high risk is in a short term basis, probably this will help both parts to comprehend why is important to keep good finance health when an emergency situation occurs. * Lawrence Sports is a 20 million revenue company that manufactures and distributes equipment and preventive gear for baseball, football, basketball, and volleyball. Mayo Stores is the principal customer of Lawrence Sport. Mayo also is the world leading retailer, with 3,000 stores with operations in United States, Canada, South America, and Europe. Lawrence sources all its materials from Gartner Products and Murray Leather Works. * Robert Dent is the Key Account Manager of Mayo Stores. He has shown an impressive track record in building and excellent and profitable relationship with Mayo. Ann-Wu Head is the head of vendor relationship. She feels that Lawrence Sports’ bargaining power with Gartner is restricted since Lawrence Sports is not a major customer for Gartner. She finds Murray the more flexible of the two vendors and she is looking for more vendors like them. She feels that Murray is likely to run deep financial troubles if Lawrence Sports stretches payment beyond a limit. * As managers we are responsible for the working capital management for the company. We have the commitment of keep good relations while we solve the financial problem. The credit line is 1.2 million. Actually the credit line is in the top, if Lawrence does not start an aggressive financial solution, they are in a high risk of having no cash flow solvency.
As a primary alternative the organization can evaluate their cash management policies, the inventory management policies, and debtor management policies. The cash management policy refers to “a strategy used by businesses to manage their cash flow in order to have more cash available for short-term investment. The strategy would include such things as accelerating cash receipts, prioritizing cash disbursements, and maintaining a cash balance to cover emergencies.” (Qfinance, 2012) This means that if Lawrence Sports only depends of the line of credit with a bank, the interest will affect them in a short-term basis, because when a business is developed, it is supposed to manage the short term operations with the cash gained of the business done with other parties.
The inventory management policy refers to,
The process companies use to order, receive, account for and manage the various products sold to consumers. Business owners and managers focus on this activity because inventory typically represents the second largest expenditure in a company behind payroll. Policies and procedures help companies actively manage the different products in their facilities. While standard policies and procedures exist for inventory management, owners and managers have some latitude to develop standards for their own companies. (Vitez, 2011)
As the definition states, “inventory is the second largest expenditure”, so Lawrence Sports needs to develop an inventory systems that will help them to having control over all what they buy, and sell. The time that the inventory is in a warehouse, and the time that takes this inventory to be sold is critical. An evaluation of this point will give a clear idea of what other processes should be evaluated. If is necessary to restructure and negotiate a payment plan with the suppliers, and buyers, this will help them keeping their relations. The honesty is primary, so if the parties involved are aware of how is the financial situation of Lawrence Sports, then they will comprehend the importance of keeping the businesses in a positive way.
The debt management policy purpose is “Make better financial decisions; provide clear objectives for staff; demonstrate strong financial management practices to credit rating agencies; and, distinguish policy decisions from transaction decisions.” (Butterworth, 2011) This policy provides tools to Lawrence Sports to demonstrate the interest that they have to reorganize their finances.
For any company, the idea of eliminating credit accounts put them in a better position financially. However, one of the things that can possibly threaten a company is angering customers and suppliers alike if their product or money is delayed. The contingency should be focused on trying to keep a well maintained balance between the suppliers and customers as well. This helps to generate profits more quickly, and provides satisfaction between the two and within reasonable expectations. If taking more time is necessary in order to retain the funds necessary without interrupting the maintained balance, then that time should be taken whether it be one, two, or even three years.
Contingencies should also be taken into consideration for exceptional policies. As stated by More Business (2007), “Implementing the systems of, cash in advance (CIA), cash before delivery (CBD), or cash on delivery (COD) could affect the company with lower orders as well as sales.” However, this clearly depends on the cash balance available to the buyer upon ordering and delivery. Any of these three policies can add a significant amount of stability to the cash balance of Lawrence Sports. It can also be viewed as a very strong measure of performance. If Lawrence Sports were to implement the policy of a 2% discount, it will also add to their overall cash balance.
Implementing a 2% discount along with a time period for the discount will also add additional strength to both the accounts receivable and cash balance. When the firms take advantage of a discount, it results in growing sales and also ensures a stronger position of the accounts receivable. The advantage of the discount period helps accounts receivable to receive their payments within a shorter time period. Less and less firms will tend to try and stretch their invoice payments past the time period of the discount. In the same manner fewer firms will want to stretch invoice payments past the total credit period as well, which will also affect accounts receivable in a positive way. Implementing ACH (Automated Clearing House) demands is another area of contemplation of lowering sales for Lawrence Sports. ACH means “A nationwide electronic funds transfer network which enables participating financial institutions to distribute electronic credit and debit entries to bank accounts and to settle such entries.” (Investowords, 2012) With ACH, this can affect Lawrence Sports with lower orders and sales. A lot of firms tend to try and stretch their payment as far as they can within the time period of the discount as well as the credit period in order to avoid a financial catastrophe. On the other hand, seasonal lows will tend to cause a firm to avoid making a commitment to a policy involving ACH with the reason being that it can ruin them financially. Although this type of policy guarantee that the Lawrence Sports cash balances would retain its strength, they could suffer with overall profits. “The cash conversion cycle is used to expresses the length of time that will take a company to convert their resources into cash flows.” (Investopedia, 2012) This cycle analyzes the time needed to sell the inventory, the time needed to collect receivables, and the time a company can pay the bills without incurring in any penalties. Also this measure illustrates how quickly a company can convert its products into cash through sales. Also the cash conversion cycle is define by Emery, Finnerty, and Stowe, (2007) as the length of time between the payment of accounts payable and the receipt of cash from accounts receivable. If no credit is granted, the cash is tied up since the company purchased the materials until is sold. As said these authors, “if a firm granted its customers credit but did not use credit to buy raw materials, its cash conversion cycle would be longer and if using credit to buy raw materials would shorten the firm’s cash conversion cycle”. A method to measure a decision concerning is using the cash conversion cycle formula and the inventory conversion period. The inventory conversion period is the time between buying inventory and the goods. As said by Emery, Finnerty, and Stowe, (2007) there are some principal motives to hold cash, transaction demand, precautionary demand, and speculative demand. The precautionary demand refers to uncertainty of cash flows and the margin of safety required. The speculative demand refers to the advantage that could be taken from profitable opportunities that requires cash. And the one that concerns this scenario, the transaction demand and refers to the need for cash to make payments like taxes, wages, and raw materials. These authors also said, “The need for transactions balances depends on the size of the firm, the larger the firm, the more transactions it makes.” Short-term funds are debt obligations that were originally scheduled for repayment within one year. Different sources of these funds are trade credit, bank loans, and commercial papers. The first two sources refer to borrow from suppliers and banks, respectively. Commercial paper refers to sell debts securities in the open market. In this scenario Lawrence Sports will take advantage of the trade credit by stretching the accounts payable by postponing the payment to their suppliers. Lawrence Sports will notify their suppliers about the situation and how later on they will receive full payment as always. What Lawrence Sports save for itself is a cost imposed on their suppliers.
The implementation plans of the possible alternatives mentioned above are the best way to overcome more financially efficient. As a result of the scenarios analysis we noticed that taking high risk decisions is the only way to balance the Lawrence Sports finances. We are aware about the annoying reactions of our partners, and how it could affect our relations. Ann and Bob are the key persons in the negotiation.
As a result of the decisions taken, the line of credit with the bank that was in a debt balance of $1,024,000.00, now we closed it in $87,000.00. In the first scenario the decision taken was to adjust the payment days for the suppliers, and to require from Mayo cash in advance. In the second scenario the decision taken was based with the precaution of keeping the businesses with the third parties.
In the third scenario Lawrence Sports will take a loan using the credit line for buy the necessary equipment for the business operations. The relation with Mayo is under risk, but it is possible to strengthen it in a near future. The final balance with the bank was 337,000.00. This balance has an interest rate of 10%. This represents a great saving because the interest for the amount of $1,024,000.00 was 16%. Now Lawrence is in a good financial position for take control over the financial future.
In conclusion, companies financials management is a key part of become successful or fail. The team work, managers, CEOs, suppliers, buyers, and the different departments of an organization play an important role in the management. Good or bad decisions determine what to expect from financials business management.

References
Butterworth, A.V., (March 25, 2011). Debt Management Policies. Retrieved from http://www.tngfoa.org/Debt%20Management%20Policies%20and%20Other%20Information/Debt%20Management%20Policy%20TGFOA%20Presentation%202.pdf
Emery, D.R., Finnerty, J.D., & Stowe, J.D., (2007). Working Capital Management. Corporate Financial Management Third Edition. Ch. 22. Published by Prentice Hall.Copyright ©2007 by Pearson Education, Inc.
Investopedia, (2012). Definition: Cash Conversion Cycle. Retrieved from http://www.investopedia.com/terms/c/cashconversioncycle.asp#axzz1wD7eA6ku
Investowords, (2012). Definition: Automated Clearing House. Retrieved from http://www.investorwords.com/77/ACH.html#ixzz1wGDVnqa2
MoreBusiness, (December 29, 2007). Purchasing negotiation tips: successful negotiation with suppliers & customers. Retrieved from http://www.morebusiness.com/negotiation-tips
Q Finance, (2012). Definition: Cash Management Policy. Retrieved from http://www.qfinance.com/dictionary/cash-management
Vitez, O. (October 5, 2011). Inventory Control Policies and Procedures. Retrieved from Inventory Control Policies and Procedures | eHow.com http://www.ehow.com/list_6848714_inventory-control-policies-procedures.html#ixzz1wG9ZmAyZ