Lawrence Sports Problem Statement

Lawrence Sports Problem Statement

Business decisions involve trade off choices that impact the value of a company. Lawrence Sports is a fictional $20 million dollar revenues company that must optimize management of collections/disbursements and maintain important professional relationships. This paper uses real life examples as a benchmark for Lawrence Sports, while also discussing trade off concepts essential to any organization. Maintaining liquid assets while minimizing the cost of capital requires careful inventory/cash management.
Dell Computers is a company that successfully balances use of net working capital and cash equivalents. “We use cash generated by operations as our primary source of liquidity and believe that internally generated cash flows are sufficient to support business operations” (Dell 2007 Annual Report, Financing Receivables). This approach has resulted in $9.2 billion in cash and cash equivalents in 2008. As the annual report states, Dell has developed a way to reduce inventory risk, and close the gap between outflows and inflows by collecting receivables before disbursements, thus achieving a positive cash balance.
Lawrence Sports is struggling with trade off decisions regarding receipts and disbursements. The company allowed itself into a predicament where the bank borrowing is at the $1.2 million limit, Mayo (the retailer that contributes to 95% of Lawrence sales) needs to delay payment while promising a big order after completing payment on the week of April 4-20, and vendors need payment for raw materials used for the products that Mayo is selling. As mentioned previously, Dell Computers has developed a good policy to maintain liquidity, which is a good lesson for Lawrence.
Creating an optimal credit policy includes trade off decisions between carrying costs and shortage costs. “At the optimal amount of credit, the incremental cash flows from increased sales are exactly equal to the carrying costs from the increase in accounts receivable”(Ross et al.,...