Finance for Managerial Decision-Making

Strategic planning sets the road map and destination for a company. Without these two, a company is on auto-pilot without direction or goals. This planning requires a company to define what it is and what it is trying to accomplish. This requires establishing short and long term goals, with the short term goals serving as steps to achieve the greater long-term ones. These short-term goals all require action plans with budgets of resources and timelines for deliverables.

As we establish these plans, from the roots to the top of a company, all will be impacted and play a role in the success of these goals. There are a few methods of growth for established companies. A company can financially re-energize itself with their own profits through partial distribution of the earnings to capital and dividends. Expansion and company growth are contributable to retained earnings and bank loans. This method is known as Organic growth and may take years to accomplish. The second method of growth is a company merger.

During the combination or merger of the companies, details of economic balance are considered with the creation of the newly formed company. The third method is to acquire the company through acquisition of complete purchase of the company, capital, and typically a premium payment. During acquisitions companies can be purchased through straight payment, a majority of stock purchase or a combination of both. Simulation One Lawrence Sports Lawrence Sports had the challenge to improve cash flow and maintain successful business relationships.

Cash flow management can be a problem for any business, large or small. When organizations exceed the spending budget they are at risk of going out of business. Mayo Stores represents 95% of sales for Lawrence Sports. Lawrence Sports had opportunities trying to get Mayo to pay in a timely manner, causing Lawrence Sports to have a negative cash flow. Due to the negative cash flow Lawrence Sports had problems paying their suppliers Gartner and Murray at the agreed times. In order for a business to survive the business must be able to balance the timing of cash inflows with the cash outflows.

Vendors and suppliers should have a copy of the company’s policies and agreements made between them. Long-term relationships are best developed through good communication and following the agreements and policies set forth. Lawrence Sports should invoice immediately and follow-up on payments that are due in order to increase cash flow. Kmart Similar to Lawrence Sports, Kmart had opportunities paying vendors at the agreed time. In 2002, Kmart was past due paying 108 suppliers $51. 9 million.

The suppliers included Household Audio and Video Equipment, Wood Household Furniture, Men’s and Boys’ Clothing and Furnishings, Sporting and Athletic Goods, NEC, and Knit Underwear and Night Wear Mills. Because of the delays in payment, some vendors were attempting to shorten the payment terms. (www. kmartcorp. com) For years Kmart advertised lower prices on selected items whereas Target and Wal-mart offered storewide savings. Kmart had special brand relationships with Sesame Street and Martha Stewart to offer their customers.

Kmart’s financial troubles stem from customer complaints about service, sloppy merchandising, store inventories and uncaring employees. Due to mismanagement Kmart was forced into Chapter 11 Bankruptcy in early 2002. During this reorganization period the company was able to strengthen its balance sheet and significantly reduce debt, develop a more disciplined, efficient organization and lower its overall operating costs. Kmart emerged from Chapter 11 focused on delivering value to customers and shareholders.