Lawson Case free essay sample

Executive Summary Lawson is a general merchandising retailer in Riverdale, Ontario, which has had four consecutive years of revenue and profit increases. The owner, Paul Mackay wanted to operate a store that stressed value at competitive prices targeting low to middle income families. With a wide range of products, Paul has been using only one supplier. The supplier, FWL allows Paul to order on credit and pay at scheduled intervals. Problem Statement Lawson is a clothing retailer who has recently met with a bank official asking them for a couple of new services from the bank. The first new service that they have requested is a bank loan that would be used to pay down their trade debt. Their current interest rate on the trade debt is 13. 5% and the owner of Lawson, Paul MacKay, feels that he can secure a bank loan that would in turn have a lower interest rate. We will write a custom essay sample on Lawson Case or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The second new service that they have requested is a line of credit, the line of credit would be used to help, when the sales are down and cash flow is short. Paul feels that a line of credit will ensure that the store will be able to meet their debt obligation with their main trade supplier. Lawson is also carrying a lot of inventory on their balance sheet, since they have a high inventory their trade debt is also fairly large as they are on a basis similar to consignment with the supplier. Analysis When looking at this case we have to see whether a bank loan would be the most advantage solution to the problem. I believe that a bank loan if secured will decrease the interest that is being paid on the outstanding trade debt. I do not think that the bank loan is the most economical way to approach the increase in trade debt that Lawson has. Lawson needs to look at he increase that they have in their inventory. A question that needs to be asked is why the inventory has increased so much in the last few years. Is Lawson over estimating their need for inventory and then having a hard time selling the inventory that they have. Is the any of the inventory that Lawsons shows on the balance sheet obsolete? If there is any obsolete inventory can it be sent back to the supplier for a refund or sold at a discount. When looking at the financials of this company, I see that once the inventory and trade debt is eliminated there is not a lot of money in the company. Lawson also has a debt to Commercial Bank of Ontario that is secured by a pledge against all company assets and a guarantee by FWL, Lawson’s main supplier. Even this loan is recorded on the balance sheet as more than the company’s assets. With an increase in sales of 10% and decrease in the interest paid on the trade debt, Lawsons may not get ahead because Paul Mackay has increased his withdraws as well. Conclusions Based on Lawson’s current position, I do not feel that the best option for Lawson is a bank loan. Lawson has to find a way to decrease its inventory and in turn control its trade debt. The trade debt can be controlled by finding other suppliers in order to keep the cost of goods sold down. FWL is considered a distributer, and as such distributers are known to increase product prices when it sells to its customers as this is how they make their money. Lawson should decrease its dependency on its distributer, FWL and this will in turn decrease the interest that is paid, As a business having only one supplier is becoming Lawson’s downfall as they have no leverage on pricing.