Running head: Scenario 1 – Week 1
Working Capital Management – Scenario 1
University of Phoenix
Introduction
Lawrence Sports is a $20 million sporting goods company. Mayo Stores a leading retailer is Lawrence Sports’ primary customer, while its suppliers are Gartner Products and Murray Leather Works. Lawrence Sports’ Finance manager has the responsibility of managing the cash flow for the company on a day-to-day basis. The Finance Manager at Lawrence Sports has to keep the loan burden minimal by negotiating short- term payments and collection arrangements with the business partners while maintaining good relationships with them. This paper will also focus on the cash flow problem in this situation from the perspective of Murray Leather Works. Murray specializes in semi-finished leather products. Lawrence Sports is the major customer for this $10 million revenue company, contributing 75% of its sales. As, such, any cash flow problems at Lawrence Sports resulting in stretched out payments for Murray will put it in severe financial difficulties.
Details
Current Situation
As of the week of March 31-April 6, the major customer of Lawrence Sports, Mayo has defaulted, the 80% outstanding payments for the weeks of March 17-23 and March 24-30. Furthermore, Mayo has indicated that it will not pay any money until the week of April 14-20. Lawrence had managed the week of 24-30 by borrowing from the bank and deferring payment to Gartner by a week. The loan and interest burden for Lawrence Sports have gone up. At LS, a minimum cash balance of $50,000 has to be maintained. For additional cash needs money can be borrowed from the bank with a credit limit of $ 1.2 million. Murray requires 15% payment on purchase and the remaining 85% in the next week.
Problem
Lawrence Sports does not have a cash flow management policy and as a result LS is unable to meet its obligations (pay its bills) to its suppliers due to insufficient funds...