Fin571 Law Recommendation for Lawrence Sports
- Submitted by: wgilber1
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- Date Submitted: 10/11/2010 01:11 PM
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Implementation of Recommendation
The most appropriate recommendation for Lawrence Sports is to implement the conservative approach. “The conservative approach states that the proportion of current assets to current liabilities should be kept at 2:1. If this proportion is kept, the company would be able to maintain its financial solvency” (“Working Capital Circumstances in the Company”, 2008, p 1). Rarely does a firm maintain the 2:1 ratio; the average ratio for firms employing the conservative approach is 1.4:1. Therefore, Lawrence must maintain 140% of the total outflow in assets.
Lawrence’s outflows include operating expenses and payments to Gartner and Murray. Over a seven-week period (from March 10th to April 27th), the total cash outflow is $2,637,000. To successfully implement the conservative approach, Lawrence must secure $3,691,000 in assets to ensure a constant state of solvency. The conservative approach to managing working capital limits the usage of short-term loans and relies on long-term loans. “Long-term financing is used to finance all of the firm’s long-term assets, all of its permanent current assets, and some of its temporary current assets” (Emery, 2007, p.642). Currently, Lawrence only ends the period from March 10th to April 27th with approximately $2,751,000 in assets. Because this level of assets falls short to what is needed to maintain solvency, Lawrence will need to secure a long-term loan to maintain the company’s safety net.
In addition to alleviating the crisis of paying vendors when merchants default, such as Mayo’s trouble with making scheduled payments to Lawrence, the conservative method will create opportunity to incur financial gains. If excess assets are not needed in a particular time period, “the firm invests the excess funds in marketable securities. By financing a portion of its seasonal needs for funds on a long-term basis, the firm builds in a margin of safety” (Emery, 2007, p.1). However, because...
The most appropriate recommendation for Lawrence Sports is to implement the conservative approach. “The conservative approach states that the proportion of current assets to current liabilities should be kept at 2:1. If this proportion is kept, the company would be able to maintain its financial solvency” (“Working Capital Circumstances in the Company”, 2008, p 1). Rarely does a firm maintain the 2:1 ratio; the average ratio for firms employing the conservative approach is 1.4:1. Therefore, Lawrence must maintain 140% of the total outflow in assets.
Lawrence’s outflows include operating expenses and payments to Gartner and Murray. Over a seven-week period (from March 10th to April 27th), the total cash outflow is $2,637,000. To successfully implement the conservative approach, Lawrence must secure $3,691,000 in assets to ensure a constant state of solvency. The conservative approach to managing working capital limits the usage of short-term loans and relies on long-term loans. “Long-term financing is used to finance all of the firm’s long-term assets, all of its permanent current assets, and some of its temporary current assets” (Emery, 2007, p.642). Currently, Lawrence only ends the period from March 10th to April 27th with approximately $2,751,000 in assets. Because this level of assets falls short to what is needed to maintain solvency, Lawrence will need to secure a long-term loan to maintain the company’s safety net.
In addition to alleviating the crisis of paying vendors when merchants default, such as Mayo’s trouble with making scheduled payments to Lawrence, the conservative method will create opportunity to incur financial gains. If excess assets are not needed in a particular time period, “the firm invests the excess funds in marketable securities. By financing a portion of its seasonal needs for funds on a long-term basis, the firm builds in a margin of safety” (Emery, 2007, p.1). However, because...