is presently in need of capital management analysis and methodology overhaul.
Mayo, who is a retailer responsible for 95% of sales, is hindering Lawrence from paying raw materials suppliers. Unfortunately, this cash positioning problem is direct result of the Lawrence credit policy and the Mayo request to delay payment until the week of April 14-20. Borrowing money to deal with supplier payables is not an option, due to the $1.2 million dollar maximized bank limit. Therefore, this paper will strategize from the perspective of a financial manager who will turn a working capital problem into the chance to design a new credit policy, implement cash management models and introduce risk mitigation techniques.
A credit policy that is too liberal will continue to cause damage to Lawrence Sports. Presently both receivables and payables are unsynchronized, which is putting undue financial distress on the firm, as well threatening supplier relationships that have helped build the company. Considering the dominant sales role that Mayo plays in the supply chain, Lawrence will have to be very careful in pressuring the payment of receivables.
Usually a firm will extend credit if the choice to do so is at lower cost; however, Lawrence is not in a bargaining position. “In general, a firm will extend trade credit if it has a comparative advantage in doing so” (Ross et al., 2005).
Issues and Opportunities
Lawrence does not have leverage to build the business due to unpredictable cash flows. Though this situation is limiting growth, redefining the cash management strategy will open new opportunities within the current supply chain system. Focusing on realistic inventory turnover that creates a positive cash balance will shift the failing policies towards a fresh perspective.
“Most financial managers regard a planned cash balance of zero as driving too close to the edge of a cliff. They establish a minimum operating cash balance to absorb unexpected cash inflows...