Working Capital Management Concepts Worksheet

Working Capital Management Concepts Worksheet

Amber Collins

University of Phoenix

May 31, 2007

Working Capital Management Concepts Worksheet

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

Describe the firm’s cash conversion cycle: Cash inflow “Most firms keep track of the average time it takes customers to pay their bills. From this they can forecast what proportion of a quarter's sales is likely to be converted into cash in that quarter and what proportion is likely to be carried over to the next quarter as accounts receivable” (Allen, Brealey, & Myers 2005). Lawrence having a positive cash balance would have help in the event of emergencies as well as unplanned outflow of money. Cash flow comes from collections on accounts receivable (Allen, Brealey, & Myers 2005).

Examine the effects of credit policy on cash conversion cycle and revenue: Commitment Lawrence had a commitment to the bank, Mayo, Murray, and Gartner. Mayo, Murray and Gartner had a commitment to Lawrence in the simulation it gives good examples on how by not being committed and sticking to that commitment can affect not only you but also others. Making difficult on the working capital manager. Causing them to make difficult decisions. Upon research a company called American Bicycle Group has a discount program set in place for dealers. “ABG based the program on timely dealer payments and a unit commitment that dealers are comfortable with, Harston said. Terms are net 30 after dealers take delivery. Discounts are built in with timely payments. Dealer enrollment in the program ends June 30” (Sani 2006). Lawrence should possible think about having a discount sent for the partners giving them incentive to make payments on time or earlier than the due date . Commitment-

Examine the effects of account payable terms on cash conversion cycle and cost of goods: Collection policy The final step in credit management is to collect payment. “When a customer is in arrears, the usual procedure is to send a statement of account and to follow this at intervals with increasingly insistent letters or telephone calls” (Allen, Brealey, & Myers 2005). Lawrence would need to follow the steps of sending letter only if their partner defaulted severely on the payments. Right now would not be necessary and would only cause tension with the partners. Collection Policy-When a customer is in arrears, the usual procedure is to send a statement of account and to follow this at intervals with increasingly insistent letters or telephone calls (Allen, Brealey, & Myers 2005)

Explain working capital practices: The promise to pay

In the simulation Lawrence is having a problem with Mayo not making the payment on time which causes a problem for Lawrence. If Lawrence would have a commercial draft they would not have to worry because they would have the money as soon as the product