Problem Solution: Lawrence Sports Inc.
Working capital management is defined as short-term and current assets and liabilities that a company uses in its daily operations. Being able to master the working capital of the company will enable them to meet and exceed targeted goals for the success of the company. It is also important to manage the daily, weekly, monthly and annual cash flows in order to meet sales goals, pay vendors, and collect receivables. By developing practices to monitor their working capital, companies have the opportunity to increase their revenues and optimize their resources.
Situation Analysis
Issue and Opportunity Identification
Lawrence Sports manufactures and sells equipment and protective gear for football, baseball, basketball and volleyball. They have annual revenues of $20 million each year. One of the problems facing Lawrence is that they rely on the sales to only one major customer who comprises 95% of their annual revenue. This customer, Mayo Store, is the world’s leading retailer in recreation equipment. Lawrence’s two main suppliers are Gartner products and Murray Leather Works. Relying on a limited customer base has put Lawrence in an unfavorable position when it comes to managing its cash flows on a monthly basis. Because of the shortcomings of their accounts receivable, they have to rely on a continuous line of credit from their bank to pay monthly operating expenses. This line of credit issued to Lawrence to cover monthly expenses is payable at the end of the next month creating a never ending cycle of short-term loans and increased interest payments (UOP, 2008)
The terms that Lawrence has set up with Mayo are 20% due at the time of sale and the remaining 80% due the following week. Mayo has notified them that they will be unable to pay their balance on their account for an entire month. When Mayo defaults on this credit terms it causes the cash flows of Lawrence to get greatly affected. They are unable to...