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Lawrence Sport Scenerio Essay

1594 words - 7 pages

Learning Team Assignment: The Lawrence Sports Simulation
Lawrence Sports is a manufacturer of sports equipment bringing in $20 million in revenue per year. They have two sources of materials, Gartner Products and Murray Leather Works and supply mainly to Mayo Stores, the largest retailer in the world for sports equipment.
In the simulation, the team becomes the finance manager at Lawrence, responsible for planning the working capital starting in April, reporting to Chief Financial Officer, Stephanie Sanders.
Lawrence has an open line of credit with their bank to retain a minimum cash balance of $50,000 with a limit of $1.2 million. The interest rate increases as the loan amount ...view middle of the document...

This alternative is called a trade credit, which is “an arrangement to buy goods or service on account, that is, without making immediate cash payment” (Entrepreneur Magazine's). “Trade credit is the largest single source of short-term funds for businesses, representing approximately one-third” of many businesses short-term debt (Emery, Finnery &Stowe, p. 649, 2007). It is common for a buyer to request 60-day net terms on raw goods. This alternative would be more desirable than taking loans from a bank because the bank interest starts at 10% and most often supplier’s credit only costs 2%. Gartner has control of 37% of the market, leaving 63% open to other suppliers, so Gartner is not irreplaceable and there could be alternate suppliers that would give Lawrence Sports at least one-month’s credit. Negotiating better terms with Gartner is especially important because Lawrence sources about 70% of its raw materials from the supplier of which they have been a regular and long time customer, earning some amount of influence even if small.
The second alternative is for Lawrence to negotiate with Mayo Stores to receive full payment on delivery. The first trouble in the simulation comes when Mayo defaults saying they will pay almost a month late. This will cause Lawrence to have to borrow from the bank and defer payment to suppliers. While Lawrence does not want to upset their largest buyer, they must request payment sooner. This second alternative may be more difficult. Mayo purchases 95% of the production of Lawrence Sports and Mayo is in a strong bargaining position being the world’s largest retailer. Once Lawrence Sports builds up more customers and other buyers for its product, the bargaining power that Mayo stores has may change. By obtaining more customers, Lawrence Sports should be able to reduce it working capital risk.
The third alternative is for Lawrence Sports to negotiate a higher price with Mayo Stores, so that they can defray the cost of the line of credit. This third alternative is one which Lawrence Sports resigns itself to the idea of meeting all of it’s’ working capital needs through the bank line of credit. This would cause an additional capital cost that will reflect in the price Lawrence charges customers like Mayo. However, the profitability of Lawrence should not be affected because of the adverse credit policies and actions of the suppliers and customers.
It is recommended that Lawrence should use a mix of the trade credit from the first alternative and parts of the second alternative of requesting payment from buyers sooner. Lawrence should negotiate for better terms with Murray and Gartner on one side and then with Mayo Stores on the other. As shown below in Table 1, this would shorten the cash conversion cycle at Lawrence, receiving as long as possible to pay suppliers while collecting payments from buyers as fast as possible (Emery, Finnery & Stowe, p. 643, 2007). On the suppler side with Murray...

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