Concept Application of Concept in the Simulation reference to Concept in Reading

Concept Application of Concept in the Simulation Reference to Concept in Reading

Explains working capital practices

o Inventory management

o credit management

Mayo the principal customer for Lawrence Sports has defaulted on their loans payments for two weeks and can not pay until two weeks later. To make up for the deficit Lawrence Sports has borrowed from the bank and deferred payments to Gartner by a week, the interest burden has gone up significantly. Lawrence needs a plan to manage Lawrence’s cash. A firms accounts receivables

When one company sells goods to another, it does not usually expect to be paid immediately. These unpaid bills are trade credits and compose the bulk of accounts receivables.

(Brealey, Myers & Allen, 2005, pg 814)

Examine effects of accounts payable terms on cash conversion cycle and costs of goods

o collection policy

o terms of sale

Lawrence set the terms of sale as 20% collection and sales and balance of 80% due the following week. Not all sales involve credit, you can demand cash on delivery (COD) and it may be sensible for you to demand cash on delivery. Most companies offer a cash discount for prompt payments on accounts, if payment is received within 30 days a 2% discount is applied. These terms are referred to as 2/10 net 30.

(Brealey, Myers & Allen, 2005, pg 814)

Examine the effects of credit policy on cash conversion cycle and revenue

o medium term notes

o bank loans

When the bank provides Lawrence with capital to stay at the operating balance the bank charges the interest rates on an escalating scale, the more money borrowed the higher the interest rate. Bank interest rates vary with the short term loans, it may be set 1% higher over LIBOR, large regular borrowers have found it cheaper to bypass

the banking system and issue their own short-term unsecured debt.

loans that are marketed on a regular basis are

known as medium-term notes.

(Brealey,