Lawrence Sports Worksheet
Concept Application of Concept in the Simulation Reference to Concept in Reading
Stretching payables
Due to unexpected problems with its working capital, Lawrence Sports found it necessary to increase its short-term financing. This manipulation of cash flow was necessary to pay back a portion of its bank loan (University of Phoenix, 2008). One method of obtaining short-term financing is to stretch payables, or delay payment to vendors. Although this option helped Lawrence Sports pay off a portion of its loans, stretching the payables put stress on Lawrence's relationships with its vendors.
Furthermore, it is likely that Lawrence Sports missed discounts offered to customers that pay promptly. By stretching its payables, Lawrence's costs ultimately were higher than originally expected. "Delayed payment is sometimes called stretching your payables. Stretching is one source of short-term financing, but for most firms it is an expensive source, because by stretching they lose discounts given to firms that pay promptly" (Brealey, Myers & Allen, 2005, Chap. 31, p. 12).
Commitment
Lawrence Sports has a line of credit with its bank, Central Bank. The scenario states that Lawrence Sports must maintain a minimum cash balance of $50,000 (University of Phoenix, 2008). Whenever there is a cash deficit, the bank automatically borrows more up to a $1.2 million maximum. It is to Lawrence's benefit to borrow as little money as possible from Central Bank since their interest rate increases as their borrowing increases (University of Phoenix, 2008). "Companies sometimes wait until they need the money before they apply for a bank loan, but nearly three-quarters of commercial bank loans are made under commitment. In this case, the company establishes a line of credit that allows it to borrow from the bank up to an established limit. This line of credit may be an evergreen credit with no fixed maturity, but more commonly it is a revolving...
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