Working Capital Management Concepts Worksheet
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...
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