Mba 550 - Working Capital Management Concept Worksheet

Working Capital Management Concepts Worksheet

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

Lawrence focuses on one of the four principal types of current asset, “Accounts Receivables.”

Lawrence Sports is a $20 million revenue company that manufactures and distributes sporting goods. The world’s leading retailer, Mayo is Lawrence’s principal customer and having difficult time payment to Lawrence that has applied pressure to receive payment from Mayo in a timely manner. This will reduce the burden on future finances and forecasting options. They need to do by negotiating short-term payment and collection arrangement with Mayo. “Company frequently sells goods on credit, so that it may be weeks or even months before the company is paid.” (Brealey-Myers-Allen, 2005). The cash flow from Lawrence comes from collections on accounts receivable. “The Company’s Credit Manager sets the terms for payment, decides which customers should be offered credit, and ensures that they pay promptly,” (Brealey-Myers-Allen, 2005).

Financial manager must find short-term financing to cover Lawrence’s forecasted cash requirement.

Lawrence Sports currently finances all cash flow shortages with $1.2 million line of credit from central bank to maintain minimum positive cash balance of $50,000. Lawrence sources all its materials from Gartner Products and Murray Leather Works. The credit terms and policy with Gartner is 40% payment upon purchase and 60% in the following week. The credit terms and policy with Murray is 15% payment upon purchase and 85% in the following week. Financial manager specifies forecasted cash requirements or surpluses, interest rates, bank loans, accounts payables and credit limits, etc. Short-term financing can include a variety of financial vehicles for Lawrence Sports which could include but not limited to new financial relationships, on-time payments and trade credit.

Negotiate customers and suppliers to optimize the resources and financing relationships.

Lawrence Sports viability relies on the ability to manage successfully receivables, payables and inventory consequently the current cycle with Mayo Stores and others must change. The company must increase its customer base; improve their credit and collection policy along with wisely investing their cash. Lawrence can reduce overhead cost and improve supply chain inventory monitoring as a short-term solution while increasing cash reserves. Lawrence must have a firmer credit collection policy that can reduce the cash conversion cycle. Cash flow is affected by both the cash- inflow that comes from collections on account receivables while cash outflow occur when liabilities are paid.

Analyze how the firm’s financial decisions affect its working capital and cash balances. The company establishes a minimum operating cash balance to absorb unexpected cash inflows and outflows. The most important current liabilities in Lawrence are line of credit and accounts payable. Lawrence needs to develop a working capital policy, cash balance requirements, credit policy, supplier negotiation strategy, short-term financing and measurable metrics to monitor performance against policy. “The best short-term financial plan inevitably proceeds by trial and error.” “Financial