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Lawrence Simulation Paper Fin 571

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Lawrence Sports Simulation
Lawrence Sports experienced difficult times in March and April when their biggest consumer could not pay for its products. Because of this, the cash conversion cycle was examined as well as the working capital management presently used. Additional views were studied to determine the best course of action for the company. Although multiple factors play a role in determining the best working capital management policy, Team D will offer recommendations and how each philosophy would be beneficial for Lawrence Sports.
Cash Conversion Cycle

Emery, Finnerty, and Stowe (2007) summarized that “the cash conversion cycle is the length of time between when a firm pays its accounts payable and when it collects on its accounts receivable and is equal to the inventory conversion period plus the receivables collection period minus the payables deferral period” (p. 659). The initial start for the cash implementation plan would be to create and demonstrate a vendor program, such as a payable deferral period program and create longer cash conversion cycles for floating payment programs for payments going to the banks. Next pre-arrange the short term borrowing program by using short term marketable securities.
The Lawrence Sports Company financial departments need to begin following strict money formulas before any transactions pertaining to the market are made. Then it would be smart to hold cash balances for pertinent needs. This will allow and open doors for investing in inventories for the future and existing. The approach mention above is a mature approach that will melt the Lawrence customer base needs more quickly and give them more time along with extending credit to those major customer’s. The main standard for Lawrence Sports cash conversion plan will be to maintain operations as a fundamentally strong business that will plan toward short term and long-term cash and needs that will be profitable. Lawrence has to be a better manager on the days the company’s business operation is depending on the cash flow. They currently allocate a specific number of days for their inventory, receivables, and payables. Target Inventory Processing Period 9 (days) +72 Target Receivables Processing Period 0 (days) +45 Target Payables Processing Period 1 (days) -72 Target Cash Conversion Cycle 0 (days) -45 Lawrence’s goal will be to keep the cash processing days to 72. This is important for Lawrence Sports to maintain the inventory along with the receivables days in the positive and out of the red. “The cash conversion cycle is simply the duration of time it takes a company to convert its activities requiring cash back into cash returns. The cycle is composed of the 3 main working capital components: accountings receivables outstanding in days (ARO), accounts payable outstanding in days (APO) and inventory in days (IOD). The cash conversion cycle (CCC) is equal to the time is takes to sell inventory and collect receivables less the time it takes to pay your payables, or: CCC=IOD + ARO – APO” (Schein, J). Lawrence has to have liquid assets available to pay their creditors. Then net working capital will become a factor in the company’s financial strategy. This strategy (cash implementation) cannot hold or keep huge amounts of money tied up in working assets but this will allow the money to be placed into fixed assets when needed; such as paying for liabilities or purchasing new equipment. The simplest approach to managing the company’s long-term dates, projects, and fluctuations is their seasonality, which affects their existing assets on the spot bringing working capital and variable capital inward with positive control. LS should borrow approximately one million dollars. This will give them money for operating capital for assistance during the spending cycle in the spring. Lawrence is strongly adamant that with new moderate working capital policies in place, the working capital investments, finances strategies, and practices will assist business growth. In addition this will create adequate cash flow. This will provide steady cash resource and maintain a positive relationship with vendors and customer.
Working Capital
Working capital is designed to generate wealth for stockholders while producing a positive NPV (Capital Structure: Optimal Composition, 2010). Business relationships such as sales impact, liquidity, relations with stockholders, and short-term financing mix play a huge part in the success of the business. There are three approaches used to finance business. The maturity matching approach, the conservative approach, and the aggressive approach include risk and must be analyzed to make a decision of the best method to use in an effort to maximize profit and external relationships with present and potential stakeholders. A cash conversion cycle must be established so that the length of time between payments of accounts payable and the receipts of accounts receivables are known to all parties involved (Understanding And Controlling Cash Flow, 2009).
Lawrence Sports Company has several options to develop and implement their cash conversion cycle. Mayo Store is Lawrence Sport’s principal customer, whereas Gartner Products and Murray Leather Works supplies all the material that Lawrence sports needs. Borrowing for Lawrence sports has reached an all- high and has to be brought under control by reaching payment agreements. If payments are demanded the first week Mayo may seek other avenues to supply product and waiting an additional month dramatically will increase the debt Lawrence Sports would face. All outstanding balances should be collected from Mayo in an effort to reduce the debt required to operate.
Gartner will need to receive 40% on purchases, 20% in two weeks and the remaining 40% the week after. This action will make Gartner a little unhappy but cash balancing has increased and debt is cut in half. Murray can afford to take a deferment of all outstanding payments until the following month. If forced to make changes in payment arrangements, they have an option to reduce the amount of material supplied. This action could reduce the amount of product supplied to Lawrence’s primary source of income. Gartner should be allowed to continue the existing arrangement of paying 40% on the purchase and the remaining balance in the following week.
Payments to suppliers should be spread over several weeks to hold to as much cash as possible and still meeting payment requirements. Unexpected events can occur and can cause but the debt to be too much to handle. Mayo will be required to pay 40% one week and the remaining 60% the next week. Terms will have to remain flexible based on operational demands.
In order for Lawrence Sports to have a positive cash flow outstanding payments will be 60% one week and 40% the following week from Gartner to remain with a positive cash flow. Payments from Murray can be deferred from time to time maximizing profit.
Lawrence Sports needs to control its cash, inventory should be kept at a minimum, and short-term loans should be paid according to term. Lawrence Sports will have to determine who receives credit and whom credit is opened with. Maintaining the cash conversion policy will determine how successful a company is in collecting receivables and how successful a company will be in acquiring best rates for their own credit.
The current state for companies in these times of financial crisis is not the best. The current economic state is making companies build up huge spare-cash levels and taking them to unprecedented heights. Companies must come together and figure out ways of making sustainable improvements to the management of working capital and cash flow intelligence. The main point of working capital is making improvements that will sustain throughout the company. "Cash is a cushion in times of turmoil, but its value is limited when you don’t have reliable information about cash flow drivers or plans to use that cash in economically efficient ways"(Sustainable, 2011). The best practices for companies like Lawrence Sports to build on improved working capital polices that can be defined in seven key areas. When assessing these seven key areas such as defined metrics, a timely reporting schedule, accountability for results, a cross-functional perspective, frequent summaries for executives, automated systems for reporting and analytics, and benchmarks for process performance a company can better manage their working capital (Sustainable, 2011). There has been much research done on working capital improvement, and that should not end anytime soon for continued expertise for better management of working capital.
An alternative method to help prevent the cash flow issues that Lawrence Sport faced during March and April, the company could implement a conservative approach. In the maturity-matching approach as stated above, Lawrence assumed Mayo would remain current in their payments. However, when Mayo began struggling in March and April, this had a direct effect on Lawrence. In addition to the expectations of funds available, a swing in the economy or an increase in their costs of products purchased effects the cash flow (Emery, Finnerty, & Stowe, 2007). The conservative approach helps to balance out potentials difficulties. The conservative approach would offer more long-term financing rather than short-term.
Increasing cash flow, decreasing amounts owed to creditors and paying the short-term loans would help Lawrence Sports remain in the black throughout the year. The success of this approach depends upon cooperation from the customers as well as the vendors in arranging payments that are acceptable to all parties. This will lead to an improved working capital management system for Lawrence Sports.
Reference
Schein, J. (2012). Cash Flow, Profits and the Cash Conversion Cycle. Retrieved from http://www.streetdirectory.com/travel_guide/174/business_and_finance/cash_flow_profits_and_the_cash_conversion_cycle.htm
Emery, D.R., Finnerty, J.D., & Stowe, J.D. (2007). The Financial Environment: Concepts and Principles. Corporate Financial Management. (3rd ed.). Morristown, NJ: Wohl Publishing Inc.
University of Phoenix. (2002). Working capital management simulation: Lawrence sports [Multimedia]. Retrieved from University of Phoenix, FIN571 - Corporate Finance website.
Understanding and Controlling Cash Flow. (2009). Retrieved from http://indus.sba.gov/idc/groups/public/documents/sba_homepage/pub_fm4.pdf
Capital Structure: Optimal Composition. (2010). Retrieved from http://scribbledviews.wordpress.com/2010/03/07/capital-structure-optimal-composition/
Sustainable Working Capital Improvements. (2011). Retrieved from http://bigfatfinanceblog.com/2011/02/22/sustainable-working-capital-improvements- making-best-practices-stick/

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