Lawrence Sports Simulation
Robert Colgan, Amanda Jagessar, Lori Lewis,
Rich Lehtimaki, Denise Smith
FIN/571
April 25, 2011
Dick Vermeer
Lawrence Sports Simulation
Introduction – Amanda
Lawrence Sports is a $20 million dollar revenue company that manufactures and distributes protective sporting gear (University of Phoenix, 2010). The company is currently facing a cash deficit problem. Lawrence Sports’ principal customer, Mayo Stores, has defaulted on payment which forces Lawrence Sports to borrow money from the bank and defer payments to their vendors. This paper will discuss the three alternative working capital polices examined in chapter 22 of Corporate Financial Management, and recommend a policy that Lawrence Sports should follow to minimize its loan burden while at the same time achieve good relationships with their business partners and cater to the working capital needs of the company. Lawrence Sports’ cash conversion cycle will also be reviewed and explain its importance to working capital management.
The Matching-Maturity Approach -Rich
The first working capital management policy option the management at Lawrence Sports can select is the matching-maturity approach. In the maturity-matching approach “a firm hedges its risk by matching the maturities of its assets and liabilities” (Emery, Finnerty & Stowe, pg. 640, 2007). This means the financing of long-term assets is with long-term credit and current assets financed with short-term credit that minimizes the risk that Lawrence Sports will be cannot pay off its maturing obligations. The maturity-matching approach will also allow Lawrence to finance long-term plans and decrease the effect of short-term payment problems it has been receiving from some of its suppliers and purchasers. Even though maturity-matching approach minimizes the chance that Lawrence Sports will not be able to pay off its maturing obligation, risks do exist with this policy.
Using the maturity-matching policy,...