The management of any company is preoccupied with the company’s financial welfare. To be able to properly manage the capital of the firm, management needs definite working capital policies. Considering new working capital policies is extremely vital for Lawrence Sports. Working capital management is, as a rule, aimed at maximizing the wealth. However, in case with Lawrence Sports, alternative working capital policies are required to reduce future difficulties. Any company, be it a large corporation or a small firm, is not proof against difficulties, irrespective of how talented its management is. It is necessary to consider three alternative working capital policies for Lawrence Sports that will help it reduce future difficulties, as well as consider which complications its working capital management may face if their financial activity is from another country.
One of the alternative working capital policies is the hedging policy, or maturity-matching policy. This is a moderate policy with which the firm finances its fixed assets and permanent current assets with its long term sources and its temporary current assets are financed through short term financing. At the same time, “inventories and receivables … remain above some minimum level” (Emery et al., 2007). If Lawrence Sports adopts this policy, it will be able to match its assets and liabilities to its maturities.
Another alternative policy is the conservative policy. The essence of this policy is that the firm that follows it has maximum cash on hands. If Lawrence Sports adopts this policy, its fixed assets (as well as a certain part of the current ones) will be financed by the permanent funds. This means that “only when asset needs are high will the firm use short-term financing” (Emery, Finnerty, & Stowe, 2007, p. 642). Since the risks will be lower, the returns will be lower as well this is why Lawrence Sports should think twice before adopting this policy.
The final alternative working capital policy is the aggressive policy. With this working capital policy, the company will use more short-term financing with the purpose of raising profitability (Emery et al., 2007). Namely this policy is recommended for the Lawrence Sports because it will help it to deal with the current problems quickly, as well as reduce the risks it may face in future. However, it should be mentioned that aggressive working capital policies often lead to the increased risk (Horne & Wachowicz, 2008). Evaluating the risks that Lawrence Sports may face, it is possible to state that the only risk is that this policy is all-or-nothing. In other words, Lawrence Sports takes very high risks using its short-term funds to finance both current and fixed assets.
Nevertheless, if Lawrence Sports avoids these risks, it may still face difficulties if its financial activity is in another country. For instance, the company may experience temporary cash shortage. In this case, it may borrow cash from the international lenders at the lowest rate; the excess funds can then be placed elsewhere to get a great return (Eun & Resnick, 2005). In this way, the problem with cash shortage will be solved.
In sum, Lawrence sports may use hedging, conservative or alternative working capital policies. Moreover, if it encounters cash shortage with its financial activities in another country, it can make certain operations with borrowing money thus covering expenses and getting extra return.
Reference List
Emery, D.R., Finnerty, J.D., & Stowe, J.D. (2007). Corporate Financial management. London: Pearson Education.
Eun, C.S. & Resnick, B.G. (2005). International financial management. New York: McGraw-Hill.
Horne, J.C. & Wachowicz, J.M. (2008). Fundamentals of financial management. London: Pearson Education.