With the idea of alternatives to working capital policies that reduce future difficulties. Make a recommendation on which policy Lawrence should use.
With the idea of alternatives to working capital policies that reduce future difficulties.
Lawrence Sports should negotiate a more favorable credit terms with its suppliers namely Murray and Gartner. It should negotiate a credit term of 100% payment, four weeks after receipt of goods.
Lawrence Sports should negotiate with Mayo Stores and should request full payment on delivery.
Lawrence Sports should negotiate a higher price with Mayo Stores, so that it can defray the cost of the line of credit.
Make a recommendation on which policy Lawrence Sports should follow:
The first alternative of asking the suppliers for four weeks credits has its merits. Gartner has control over 37% of the market, so there are other suppliers that meet the needs of 63% of the market. In other words Gartner is not absolutely irreplaceable. There can be alternate suppliers that will give Lawrence Sports at least one month's credit especially since
Lawrence Sports is a regular and long time customer. With other suppliers Lawrence Sports can even negotiate 60 days credit. Similarly, Lawrence Sports can negotiate more favorable terms with Murray. It can ask for 30 or 60 days credit from Murray.
The second alternative is slightly tricky. Currently, Mayo purchases 95% of the production of Lawrence Sports and so on the face of it Mayo is in a strong bargaining position. However, the situation can change if Lawrence Sports is able develop its market and find other buyers for its products. Having more customers will reduce the working capital risk of Lawrence Sports and will reduce the bargaining power of Mayo Stores. Mayo may have an excellent reputation among its customers but this position makes its terms difficult for Lawrence Sports.
The third alternative is that Lawrence Sports resigns itself to the idea of meeting its working capital needs through bank line of credit. The cost of additional capital will reflect in the prices Lawrence Sports charges to Mayo. The profitability of Lawrence Sports cannot be adversely affected because of the adverse credit policies and actions of its suppliers and customers.
It is recommended that Lawrence Sports should use a mix of first and second alternatives, namely, it should negotiate for better terms with both Gartner and Murray on one hand and with Mayo Stores on the other hand. From the evaluation of the position of Garner and Murray it appears that negotiations will prove fruitful, however, in case of Mayo Store, it may not agree to cash on delivery terms immediately. The best strategy for reducing risk is to increase the number of customers gradually. There will be other customers that will value the high quality equipment and protective gear of Lawrence Sports.
The implementation plan for Lawrence Sports working capital needs is as follows. The objective of the plan is to ensure that there is adequate working capital with Lawrence Sports so that it does not run out of funds or need to use expensive line of credit or overdrafts.
The first part of the strategy is to conduct negotiations with Gartner and Murray, requesting them for at least 30 or 60 days credit. Suppliers like Gartner and Murray usually extend such a credit to ...
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