Working Capital Management Concepts Worksheet

Working Capital Management Concepts Worksheet

University of Phoenix

Working Capital Management Concepts Worksheet

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

Account Payable terms

Terms of Sale

Cash Discounts

The working capitol management simulation for Lawrence Sports had terms of sale set up with Mayo (Lawrence’s principle customer) of 20% collection on sale and the balance of 80% the following week. Starting the week of March 31st Mayo has defaulted on the 80% due Lawrence for the weeks of March 17 and March 24. In addition to this default Mayo has informed the company that no payments will be made until the week of April 14th. The newly appointed Finance Manger will need to renegotiate the existing terms of sales with Mayo based on the fact that deferring payment until April 14th is unacceptable. The Finance Manager will have to come to new terms on existing money owed with Mayo to keep cash inflow going while minimizing the use of short term financing. Due to the cash crunch the Finance Manger also needs to manage cash outflow (terms of sales) to Gartner and Murray. Once the issues of current payments are address the Finance Manager should negotiate with Mayo new terms of sales in which they pay a larger percentage at the point of sale. On the other side of the coin Lawrence should also negotiate with Gartner and Murray terms of sales in which Lawrence pays a smaller percentage at the point of sale. In addition to addressing Terms of Sales Lawrence should encourage it’s partners to consider cash discounts and early payment discounts.

Terms of sale differ for “firms selling consumer durables may allow the buyer a month to pay,

while those selling perishable goods, such as cheese or fresh fruit, typically demand

payment in a week. Similarly, a seller may allow more extended payment if

its customers are in a low-risk business, if their accounts are large, if they need time

to check the quality of the goods, or if the goods are not quickly resold.” (Allen, Brealey and Meyers, 2005, p. 814)

Cash discounts “To encourage customers to pay before the final date, it is common to offer a cash discount for prompt settlement” (Allen, Brealey and Meyers, 2005, p. 815)

Cash Conversion Cycle (CCC)

CCC is made up of cash inflow and cash out flows. The working capitol management simulation for Lawrence Sports details a 45 day cash flow plan which started March 10th and ends April 17th. The plan clearly identifies that Mayo is the primary provider of cash inflow and that Gartner, Murray and operating expenses are primary receivers of cash outflow. In the event of a cash shortage Lawrence has a line of credit with Central Bank of up to 1.2 million dollars. The inertest rate of the loan start at 10%, increases to 12% between 450K and 650K, 14% between 650K and 850K and then 16% between 850K and 1.2 million.

“Accountants start with “dollars in” and “dollars out,” but to obtain accounting

income they adjust these inputs in two important ways. First, they try to show

profit as it is earned rather than when the company and the customer get around to

paying their bills. Second, they sort cash outflows into two categories: current expenses and capital expenses.” (Allen, Brealey and Meyers, 2005, p. 114)

Working Capital

In the Lawrence Sports working capitol management simulation, working capital is comprised of current assets

• cash on hand

• investment income

• bank line of credit

• Accounts receivable (Mayo)

Liabilities