Working Capital Management 1
Working Capital Management
Hai Ho Nguyen
University of Phoenix
Fin 554—Finance for managerial Decision Making
Instructor: Kent Moser, BS, MBA
December 15, 2004
Working Capital Management
Working capital is the current cash requires for paying the operational expenses and other bills of the organization.Management of the working capital plays an important role in the survival of the company and the company’s business partners. This paper addresses the methods of collection and payment policies that have used to better balance the cash flow needs of Lawrence Sports with its business partner relations. The paper also analyzes the techniques to sustain good longer-term relations with business partners (customers and vendors) in the face of the need to improve cash flow and hold down bank borrowing. Lastly, the report also visualizes the ethical issue of possibly putting Murray out of business with Lawrence Sports need to improve its own cash flow.
Method of Collection and Payment Policies
Lawrence Sports manager decides to build good relationship with company business partner, and meanwhile he wants to hold down the bank borrowing. However, Lawrence Sports manager think that the good strategy toward the business partners is annoy them first and please them in the long run. The manager decides to put maximize pressure on its partners in March. Lawrence Sports collect all outs standing receivable from Mayo in the week of March 31 to April 6. Lawrence Sports also take tough stance and pay from Gartner on 40% on purchase, 20% into two weeks, and the remains of 40% in week later. Lawrence Sports also take a short-term decision of deferring all Murray, outstanding payment to the week of April (Simulation, 2004). Since Lawrence Sports’ financial is stable now, after May, Lawrence Sport manager decides to build the relationship with the partners. Lawrence Sports considers takingan easy collection on Mayo because Mayo contributes 95% of Lawrence Sports’ products. Seventy percents Lawrence Sports raw material is provided by Gartner. Meanwhile, Lawrence Sports consumes 37% of Gartner’s’ products. Lawrence Sports is not a major customer of Gartner. So, Lawrence Sport can moderately stress the payment to Gartner without effect Gartner financial situation. Considering on Murray, Lawrence Sport does not want to put Murray out of business by maximize payment stress on Murray. However, Murray seem to sustain the moderately stress on Lawrence’ payment.
Good Relationship with Partner versus Improvement Cash Flow
It is always mandatory to take a consideration between maintain good relationship with partner and improve a better cash flow for the company. Lawrence Sports recognize that the company in very high rich to claim bankruptcy if Mayo discontinue business with Lawrence Sports, or Gartner discontinue providing raw material for Lawrence Sports. Moreover, if the Lawrence Sport does not stress the above two company’s payments, Lawrence Sports could goes out of business itself. For the long-run, Lawrence Sports need to expense market to build more agencies who contribute at lease 50% of Lawrence Sports’ product, and meanwhile, Lawrence Sports much keep good relationship with Mayo. Considering on Gartner, Lawrence Sports must break independent form Gartner and search for other organization that provides raw material the company.
Ethical in Business
Lawrence Sports could possible putting Murray out of business for the need of its financial. However, without Murray business, Lawrence Sports may face problem with its supply in the future. This unethical act should not be considered because it will hurt the Lawrence Sports in the long run. Unethical acts also destroy Lawrence Sport reputation and its relationship with other companies. Mayo and Gartnerannoy to see Murrayfailure and be aware of Lawrence Sport’s actions.
In summary, it is crucial to manage company working capitaland hold down bank borrowing. However, there is a tradeoff between maintain company financial need and keeping business partners relationships. Manager should have good decision to keep business running well and maintain good relationship with partners. Unethical in business should be avoided as much as possible. For the long run benefit of the company, Lawrence Sports must create market diversity (increase minor agencies and material providers) to break independent from Mayo and Gartner when needed, or Lawrence Sports may take a consideration for joint venture with Mayo to improve financial status of both companies and to prevent losing Mayo.