MBA 550: Lawrence Sports - Working Capital Policy Paper

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Lawrence Sports Working Capital Policy Paper
Lawrence Sports, a manufacturer and distributor of sporting goods and supplies, has been juggling, mostly unsuccessfully, with their working capital budget. A properly planned and researched working capital policy, complete with ethical guidelines, credit policies, cash balance requirements, short-term financing plans, supplier negotiation ideas and realistic metrics should settle the current financial environment surrounding Lawrence Sports, and set it on the right path to success.

Working Capital Policy
Lawrence Sports has had a roller coaster battle with its working capital policy. The inherent need to keep vendors happy, pay bills, invest money and balance the budget has not been a very manageable process. An open-ended revolving line of credit with a local bank, with a cap of $1.2 million (per month) allows Lawrence Sports to borrow on a monthly basis, as needed. Lawrence Sports' current cash flow plan is not well-managed and appears to be running itself.

Unfortunately, the short-term needs are not supporting the ideas of long-term growth and stability. Lawrence Sports' officials have several options for achieving this balance, including: a standard cash balance procedure (with accommodations for cash reserves needed for long-term opportunities); a credit policy that brings with it a sense of equilibrium (in order to minimize accounts receivable and maximize revenue); a supplier negotiation strategy (with an agreement related to payment terms for keeping balances to a minimum (thereby lowering Lawrence Sports' costs and cash requirements); a short-term financing plan that minimizes borrowing costs, while still allowing for a credit position; and a set of metrics that can weigh the results of the performance of these plans against the policy that is set forth.

The cash balance procedure should be the focus for Lawrence Sports. Laying this piece of the plan as the foundation provides for a more stable following by the other actions. Other companies (and other industries) have faced difficulties in establishing a proper cash flow system. According to Harris (2006), a majority of accounts receivable departments at major hospitals report that 25% of their accounts are at least 90 days old and that it takes more than 11 days for hospitals to create a bill.

Cash balance procedures often include acquiring cash reserves. Extensive cash reserves has proved fruitful for other companies, as Der Hovanesian (2006) explained that Sierra Health Services' "...ample $239 million a year in free cash flow..." means "...it will not be a stand-along public company much longer." If Lawrence Sports executives are entertaining the idea of a merger or buyout, a strong showing in this are can be very beneficial.

But cash holdings do not hold a company together by themselves. An adequate credit policy should help control bad debt while ensuring future returns. Some suggestions for structuring a well-oiled credit policy include: "...outline terms and conditions of sales, ... setup billing procedures, ...have a written plan for customers who wish to open a new account, ... profiling your customer to do a strength, weakness, opportunity and threat analysis..." (Is your credit policy profitable?, 2006). Lawrence Sports can learn from some of these suggestions by making sure that each current and, especially, new customers understand the information that is gathered before credit is issues and the credit terms that will ...