Lawrence Sports is in a quandary with the working capital policy. Currently, the corporation is relying on one major customer (Mayo Stores) and their accounting procedures to manage Lawrence Sports working capital. This is resulting in a cash flow crisis in times where Mayo has not honored the existing terms of payment. In order to maximize shareholder wealth, Lawrence Sports must establish cash balance requirements that will meet existing obligations and finance future opportunities. This can be accomplished by recognizing cash balance requirements, reviewing existing credit policies, negotiating supplier terms and conditions, having a short-term finance strategy, and monitoring the performance to ensure the current methods are working. Additionally, when deciding on a working capital policy, Lawrence Sports must consider the stakeholders and understand any ethical dilemmas within the solution.
Cash Balance Requirements Having enough cash on hand to cover payables is important to any business. However, having too much cash on hand that is not earning interest does not support the financial best interest of a company.
Finance must determine the cash balance required to cover the accounts payables and manage cash reserves needed for long-term opportunities. "The cash budget tells the manager what borrowing is required or what lending will be possible in the short run," (Ross, Westerfield, & Jaffe, 2004, p. 746). Lawrence Sports currently does not have an appropriate cash budget to follow these guidelines. Reviewing the cash flow plan there are numerous weeks that the closing cash balance was under the amount needed to compensate for the total outflows. This provides the opportunity for Lawrence Sports to develop a working capital policy and a cash budget to optimize their working capital.
First, as indicated above, Lawrence Sports has several weeks that reflect a lower inflow of cash than the outflow of cash. To determine an...