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Lawrence Sports is a $20 million revenue company that manufactures and distributes equipment and protective gear for baseball, football, baseball and volleyball. Lawrence Sports purchases raw materials from Gartner Products and Murray Leather Works. Mayo’s Stores, the world’s leading retailer is Lawrence’s primary customer. Lawrence faced a cash deficit situation, borrowed money from the bank that hit the maximum line of credit 1.2 million (Simulation, 2008). A financial manager needs to analyze how Lawrence’s financial decisions affect its working capital as account receivable, account payable, cash conversion cycle, understand ratios, maintain cash balances and develop short-term financial plans. Lawrence needs to achieve a tradeoff maintaining good relationships between the partners and good working capital management. The ultimate goal of a company is to create value among stakeholders and enhance a competitive advantage by using policies and strategies (Simulation, 2008).
Issues and Opportunities Identification
The main issue with Lawrence is Mayo may not be able to make their promised payment on an account until past due and it might take for another 2 or 3 weeks perceive that they are not certain when they will be able to make payment in full. On the other hand, Lawrence cannot pay the bills due to jeopardize money shortfalls meanwhile two suppliers depend on Lawrence. Recently, Lawrence does not have cash flow management strategy. The company must maintain cash flow by dealing with payment interruption, handling funding deficit, obtaining short-term financing.
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The company has opportunities to collect account receivables along with terms of sales, the contract with customer’s signature and establish a procedure how they will pay up. Cash inflow comes from collections on account receivable and cash outflow comes up when the company make payments to the vendors (Brealey-Myers-Allen, 2005). They develop a minimum operating cash balance to absorb unexpected cash inflows and outflows. If Lawrence shortfalls money, the gap can be filled either by borrowing or holding cash reserves (Ross-Westerfield-Jaffe, 2004). A financial manager specifies interest rates, credit limits and reduces borrowing that will work out optimization models. They must understand cash conversion cycle when cash is collected from receivables and when cash is paid to the suppliers. They make negotiations between customers and suppliers to make them happy for future growth.
Lawrence has to evaluate an alternative credit policy as terms of sale, credit analysis and collection policy that determine the carrying costs associated with grant credit and opportunities costs of the lost sales from refusing to offer credit (Ross-Westerfield-Jaffw, 2004). If it reduces the chance of cash shortfalls or financial distress, hedging is helpful to use. Lawrence can also hedge with forward, future contracts and swaps. Short-term financial decisions differ from long-term decisions such as capital investment and the choice of capital structure. Short-term planning focuses on changes in cash, working capital and forecasts month by month cash requirements or surpluses by developing short-term financing strategies (Brealey-Meyers-Allen, 2005). They should expand its customer base and consider from alternative sources of funding.
GE Capital Corporation’s Working Capital
According to Cash flow overview from year 2005 to 2007, the most significant source of cash comes from customer related activities which collects cash following a product or service sale. It is likely in the scenario that collects all outstanding receivables from product sale but applied pressure to receive payment from Mayo in a timely manner. GE operating cash collections is increased every year that changes operating segment revenues. The most significant operating use of cash in GE is to pay the suppliers, employees, tax authorities and others for the wide range of materials and services necessary in a diversified global organization. Based on past performance and current expectations, in combination with the financial flexibility that comes with a strong balance sheet and the highest credit ratings, GE entered various credit enhancement positions with these securitization entities, including liquidity and credit support agreements, guarantee and reimbursement contracts (GE Corp, 2007).
GE’s aggressive asset-based risk management approach combines an extremely diverse portfolio and new digitization tools analyze risk equation, credit evaluation, asset management, account performance monitoring, and so on. In addition, Smart Tools have embedded GE’s historical economic knowledge so it can be leveraged consistently across all the businesses of GE Capital. They manage a variety risks including liquidity, market, credit risks and other risks as natural disasters, availability of necessary materials, guarantees of product performance and business interruption that differs from Lawrence’s working capital management. GE is the most widely held name in global commercial paper markets that has $84 billion of commercial paper in issue (GE Corp, 2007).
IBM’s Working Capital
As in the IBM annual report, it has consistently generated strong cash flow that shows net cash from operations, excluding the year to year change in Global Financing receivables, was $17.4 billion and $16.1 billion of cash and marketable securities in 2007. Sources of funds come from global financing including commercial financing, client financing and remarketing. Global financing is the principal revenues that supported by liquidity position and access to capital markets. Indeed, Lawrence needs to establish contingency working capital funds to meet its financial strategies. Cash generated from Global financing deployed to reduce debt, pay dividends and maintain appropriate cash requirements. In contrast, Lawrence borrowed line of credit due to not enough capital to meet the needs of its payables. Commercial financing sources from inventory and accounts receivable financing for dealers and remarketers of IBM with different payment terms.
IBM can mitigate a variety of risks as interest rate, market, residual value, foreign exchange rate and financing risks while striving for consistently strong returns on Global Financing’s equity. The company’s funding requirements are continually monitored and strategies are executed to manage the overall asset and liability profile. Additionally, the company maintains sufficient flexibility to access global funding sources as needed. The economy could impact the credit quality of the Global Financing receivables portfolio and therefore the level of provision for bad debts. Global Financing will continue to apply rigorous credit policies in both the origination of new business and the evaluation of the existing portfolio (IBM, 2007).
Whole Food’s Working Capital
Whole Foods core value focuses on not only profits but also create values for all of major stakeholders as customers, team members, suppliers, investors, and the community and environment. Lawrence needs to create value by building good relationships among stakeholders and generates tools for employees to deal with difficult financial decisions. Their principal sources of liquidity have been cash generated by operations, available unrestricted cash and cash equivalents, short-term investments and amounts available under their revolving line of credit. Their growth has been funded primarily through proceeds from public offerings, bank debt, private placements of debt, internally generated cash flow, and proceeds from stock option exercises (Whole Foods Market, 2007).
They continually evaluate the need to establish other sources of working capital and will seek those considered appropriate based upon their needs and market conditions. Lawrence should understand financial ratios that can be calculated to help determine a customer’s ability to pay its bills. They are able to negotiate better volume discounts with major vendors and distributors to meet high quality standards. They try to mitigate interest rate fluctuations their borrowing or long-term debt, market risk and foreign currency risk. Financial Manager in Lawrence can gauge current value consisting of profits that will be coming at different points in the future with different degrees of uncertainties and risks. One of the strongest advantages is Whole Foods use Economic Value Added to help make business decisions that benefit all of stakeholders (Whole Foods Markets, 2007).
In summary, there are many comparisons and contrast that all three corporations share in the development of working capital management and the approaches to increase their growth. The management team should provide the leadership, business ethics and guidance to realize a successful company in order to move a positive direction, towards solidifying their position. It is very important to focus on positive net working capital by making financing decisions. The company must tap financial sources whether short or long-term, research benchmarking that supports the success of any enterprise as well as the best practice to achieve the right balance that promote stakeholder values.
Brealey-Myers-Allen (2005). Working Capital Management: Retrieved on April 25, 2008
from University of Phoenix, Principles of Corporate Finance, Eighth Edition.
Brealey-Myers-Allen (2005). Short-Term Financial Planning: Retrieved on April 26, 2008
from University of Phoenix, Principles of Corporate Finance, Eighth Edition.
Ross-Westerfield-Jaffe (2004). Short-Term Finance and Planning: Retrieved on April 26,
2008 from University of Phoenix, Corporate Finance, Seventh Edition.
University of Phoenix (2008). Working Capital Management Scenario: Retrieved on April 26,
2008 from University of Phoenix, Week One rEsource.
IBM Corp (2007). Investor Relations: Retrieved on April 26, 2008 from
GE Capital (2007). Investor Relations: Retrieved on April 26, 2008 from
Whole Foods Market (2007). Investor Relations: Retrieved on April 27, 2008 from