Benchmarking: Lawrence Sports
Working capital management involves cash, accounts receivable, and inventory. Too much working capital is costly, reducing profitability and return on capital. Too little, however, can also be costly in terms of lost opportunities. A company may suffer increases in cost of capital due to too little cash if it cannot pay its bills on time.
Lawrence Sports (LS) is a manufacturer and distributor of protective sports gear. LS obtains its raw materials from two primary vendors: Gartner Products (GP) and Murray Leather Works (MLW). GP supplies LS with 70% of its raw materials while MLW supplies the remaining 30%. Mayo Stores is the world's leading retailer of sporting goods and accounts for 95% of LS's sales (University of Phoenix, 2002).
In recent weeks, Mayo has defaulted on 80% of its outstanding payments and LS expects additional delays of two more weeks. LS is forced to negotiate payment deferrals to GP and MLW as its outstanding loan and interest burden have increased. This paper benchmarks short-term financing options for LS and explores alternative solutions from the perspective of the Financial Manager (FM). The FM has been tasked with keeping the loan burden minimal, negotiating short-term payment and collection arrangements, and maintaining good relationships with vendors and customers.
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