According to John Leslie Livingstone in his book, "The Portable MBA in Finance and Accounting," in the short term, the availability of cash to pay bills is essential to a company's survival. Inefficient cash management can result in bankruptcy. There are many ways for a company to meet its short term cash needs. One is to manage cash inflows by accelerating payments from debtors. Another is to delay cash outflows in the form of payments owed to creditors. A third way involves borrowing money when these cash inflows and outflows cannot be properly balanced (Livingston, 1997).
Lawrence Sports is in a unique position. The company is caught in the middle of a three-way tug-of-war involving its working capital needs. Its bank has capped its borrowing capacity at $1.2 million. Its largest customer is responsible for more than 80 percent of the company's sales revenue. Therefore, Lawrence has very little negotiating power with this customer. According to Carl Warren, James Reeve, and Jonathan Duchac in their book "Accounting," companies often expect customers for to pay for products and services sold on account within the credit terms established. Unfortunately, this is not always the case. Collecting accounts receivable efficiently is the key to turning a current assets, in this case accounts receivable, into positive cash flow (Warren, Reeve, and Duchac, 2007).
Another factor involves the two primary suppliers of Lawrence. One of these suppliers is a company called Gartner. Unfortunately for Lawrence Sports, Gartner is large enough that it is largely unconcerned about the possibility of losing Lawrence as a customer. Therefore, Lawrence has little or no leverage with this particular supplier. For example, it cannot stretch out payments on balances owed to Gartner without risking being placed on credit hold. The other major supplier to Lawrence is a manufacturer called Murray. Unlike Gartner, Murray is a ...