The Lawrence Sports Simulation - Research Paper Example

?SPORTS SIMULATION The Lawrence Sports Simulation: A Recommendation Report Word Count 500 I. Introduction Lawrence Sports is an organization that boasts $20 million in revenue every year. Its chief product distributor is a chain of stores called Mayo, which has locations in the U.S., Canada, South America, and Europe. Obviously, as a leader in retail, it must be able to adequately manage its capital. There are a few stores—including Murray and Gartner—from which Lawrence’s goods are procured. In order to issue a recommendation for Lawrence Sports, a few things might be in order to mention first. There must be: three alternative working capital policies which reduce future difficulties; a recommendation on policy and an evaluation of risk associated with the recommendation; contingencies for the recommendation; performance measures used to evaluate the recommendation; an implementation plan for the recommendation; a discussion and explanation of the recommendation; a review of the cash conversion cycle for Lawrence Sports; an explanation of the importance of the cash conversion cycle to its working capital management; and a conclusion. II. Three Alternative Working Capital Policies Which Reduce Future Difficulties There are three working capital policies which have to be put in place in order to reduce future difficulties as a company. First and foremost, Lawrence Sports must realize that it can’t make more payments than purchases—as it started to do the week of March 31st—and expect to make a profit. Therefore, the company must make a policy to ensure that it is always taking in more money than it is spending. The second thing that Lawrence Sports must do is ensure that all of its vendors are paid in full without leaving capital build up in order to pay off its debts. For example, it was mentioned that Gartner was paid off 40% upfront, and then 60% in the next week. This should not be so. Debts should be paid off quickly and not be allowed to pile up. The same thing happened with Murray, when 15% was paid immediately, with 85% to be paid in the next week—where payments started taking over purchases also during the week starting March 31st. Third, what is most important is that Lawrence try to have a cash inflow total that is at least anywhere from 25 to 50% greater than its outflow. This is just to ensure that the cash inflow does not get too far below so that outflow is not greater, and is a safety measure. III. Recommendation A. The Recommendation on Policy Itself and An Evaluation of Risk Associated With the Recommendation The recommendation made to Lawrence Sports is to do some cash flow analysis—and to emphasize simply having greater cash flow coming in than going out. According to Grier (2007), “Cash, not earnings, allows a business entity to meet its financial obligations. Indeed, assessing the amounts, timing and uncertainty of cash flows is one of the basic objectives of financial reporting and analysis” (pp. 47). This policy will help the company stay solvent. However, this also means that the company has to pay its debts off quickly to these outsourced businesses which provide its products. According to Kakkar (2009), “[One should] [r]educe credit allowances and accelerate cash receipts…” (pp. 234). By reducing the amount of credit used and upping the cash receipts for accounts receivable, this will increase the cash inflow and minimize the risk of coming in below the 25% profit margin that was discussed as one section of the three policy alternatives for the company. This is why cash flow is so important. According to Fight (2005), “Analysis of cash flow, then, cannot merely isolate debt capacity but must also consider all the factors producing major changes in cash inflows and outflows” (pp. 6). Of course, the risk is that by focusing too much on cash flow, the company will neglect other areas. However, this issue is so important because it is what will make or break the company—eventually—is whether or not its ledgers are balanced. B. Contingencies For the Recommendation The recommendation that should be made to Mayo is that it will be given an extra week for paying the 80% payment for the sales in March 10-16, March 17-23, and March 24-30. This way, Mayo is not pressured into making the payments right away by Lawrence Sports—but it does give in to the request by Mayo to be able to pay all outstanding receivables the week of April 14-20. Therefore, if the receivables were to pile up, Lawrence Sports would not be making much if any revenue until mid-April, which would be difficult. In order for the entire operation to keep running smoothly, contingency plans dictate that perhaps Mayo could have about 2 weeks versus just having one, in order to pay Lawrence Sports what it owes. Until then, however, it only makes sense that Lawrence have at least some say in when Mayo will pay up—while risking that Mayo cannot pay the week of April 14th and have a looming catastrophe. C. Performance Measures Used to Evaluate the Recommendation Performance measures used to evaluate the recommendation would include that Mayo pay on-time and that Lawrence Sports be strict with deadlines so that Mayo cannot overreach its limits, nor force Lawrence Sports to have to borrow money from the bank up to $1.2 million in order to cover the lost revenue from receivables not being paid out. Additionally, Lawrence Sports should keep a certain percentage of its cash flow saved so that, just in case of an emergency, it can utilize its own funding versus having to borrow from the bank—which could be problematic, especially if Mayo defaults like it did this time in the case study, not allowing it to make payments until the week of April 14th. D. Implementation Plan for the Recommendation An implementation plan for the recommendation should be started immediately— beginning with putting Mayo on some type of probation for having defaulted on its payment to Lawrence Sports. This not only ruined Mayo’s credibility, but also put added stress and pressure upon the powers that be at Lawrence Sports to come up with some capital in order to maintain its organization while Mayo went through some financial difficulty. The implementation plan would call for Mayo to be discontinued as the major retailer for Lawrence Sports’s products should another default occur. In order to keep the debt load at a minimum, Mayo’s continued breach of the rules will lead to cutting off ties with the organization completely—as Lawrence Sports already has hit the $1.2 million dollar borrowing mark with the bank and still has deficits. IV. Discussion and Explanation of the Recommendation The recommendation to make sure the company Lawrence Sports has greater cash flow is compounded by the fact that Mayo—as a major retailer—has seriously put its credibility into jeopardy and cannot be relied upon as a source of capital. Mismanagement of its own funds has obviously put Lawrence Sports in a bad position, which is that it is now having to borrow in order to pay off debts that have accrued due to Mayo’s inability to pay its accounts’ balance. In other words, Lawrence Sports has to decide to quarantine Mayo in order to ensure that no more faulty financial decisions are made at the expense of Lawrence’s entire business operation. Mayo’s behavior cannot be excused, especially if it cannot come through the week of April the 14th. Lawrence Sports should make a point of discontinuing the relationship with Mayo until it gets better, newer management. V. Review of the Cash Conversion Cycle for Lawrence Sports Simulation After a thorough review of the cash conversion cycle for the Lawrence Sports Simulation, it is estimated that, during the last week of March starting on the 31st, the payments outweighed the purchases, causing a major loss of cash for Lawrence Sports—both regarding the suppliers of Lawrence, which were Gartner and Murray. Not only this, but the fact that Mayo defaulted on its payment to Lawrence Sports were what put Lawrence in the red with additional deficits. In order to stop the bleeding, Lawrence Sports had to reign in its spending, cut its losses, and try to maintain a working relationship with all of these companies while diplomatically distancing itself from Mayo—with which it might have to end a business relationship due to the capital mismanagement of the company, and putting Lawrence Sports at risk due to Mayo’s bad financial decisions. VI. The Importance of the Cash Conversion Cycle to Its Working Capital Management The importance of the cash conversion cycle to Lawrence Sports’s working capital management cannot be stressed enough. Since the company did not have a procedure in place with regard to its cash inflow, as a result the company got behind when it was faced with nonpayment from Mayo. Hopefully the recommendation provided here will have helped Lawrence Sports more adequately assess and maintain its solvency as a company. VII. Conclusion There were several items that were discussed at length here, including: alternative policies to be put into place to reduce future difficulties; making a recommendation; discussing and explaining the recommendation; and a review and explanation of the importance of the company’s cash conversion cycle with regard to its capital management. All of these elements had to be taken into serious consideration in order to appropriately determine the right course of action for Lawrence Sports, given the circumstances. Obviously, Lawrence Sports’s good financial decisions will prove ultimately instrumental to the company’s solvency. REFERENCES Fight, A. (2005). Cash flow forecasting. UK: Butterworth-Heinemann. Grier, W.A. (2007). Credit analysis of financial institutions. US: Euromoney Books. Kakkar, A. (2009). Small business management: concepts and techniques for improving decisions. India: Global India Publications Pvt. Ltd. Read More