Working Capital Management Policy: Lawrence Sports Simulation FIN/571
November 17, 2012
Lawrence Sports Simulation
Lawrence Sports is a manufacturer and distributor of sports equipment and protective gear for baseball, football, basketball, and volleyball. They are a $20 million revenue company that relies heavily on purchases from Mayo Stores. Mayo is the world’s leading retailer and is Lawrence’s principal customer, which contributes 95% of its sales (University of Phoenix, 2012). If Mayo defaults on payments to Lawrence the result will have a trickledown effect, which includes borrowing more money from a bank at a higher interest rate and delaying payments to Lawrence’s other business partners’ Gartner and Murray. A solid working capital policy that includes a cash conversion cycle will enable the company to develop finances in a successful way, which reduces redefining policy during times of short-term, unexpected, hardship.
Lawrence Sports will implement a Cash Conversion Cycle that will allow Lawrence Sports to forecast future sources and uses of cash flow. Emery, Finnerty, & Stowe (2007) summarize that “The cash conversion cycle is the length of time between when a firm pays its accounts payable and when it collects on its accounts receivable. The cash conversion cycle is equal to the inventory conversion period plus the receivables collection period minus the payables deferral period.” (p.659) The Cash Conversion Cycle will provide the means to keep track of average time customers pay bills and will give a view of quarter sales and cash inflow and outflow. For any business to be successful, management must ensure that the business working capital is effective and cash flow is positive to pay expenses. Team C will outline, analyze and determine which policy Lawrence Sports should follow. The three potential working capital policies that will be considered for the company are maturity matching, long-term conservative approach, and short-term aggressive approach. The policy recommendation will analyze the risk; contingency, performance, and implementation plan measure associated. Lawrence Sports believes that modifying existing working capital policies to reduce future difficulties is vital to keeping the company competitive and profitable. One working capital policy will be selected. An evaluation of the risk associated with the recommended policy will be discussed along with the contingencies. Performance measures will be discussed and an implementation plan will be included in reference to the new working capital policy for Lawrence Sports. Alternative Working Capital Policies
Working capital policies is an organization’s management of current assets and liabilities with the goal of creating a balance between profitability and liquidity so that a firm can maximize the effectiveness of its day to day cash flow management. “The two main factors that need to be considered are the risk of the finance used and the cost of finance; either by financing working capital using short or long-term source of finance” (Armah, 2010). The risk and cost associated with working capital are inversely related, the more risky a product the less the cost of borrowing is to the business, however the less risky a policy the more it costs the organization. The three most common types of alternative working capital polices include conservative, aggressive, and maturity matching approaches. Conservative Approach
The conservative approach to working capital as its names suggests notes that working daily capital is financed through long term financing and that short term financing is not commonly utilized. Short term financing is only used in emergencies and is quite restricted for daily financing activities. Emery, Finnerty, & Stowe (2007) note that the conservative approach is utilized “To guard against the risks of a credit shutoff or a sudden cost increase in lending, the conservative approach uses more long-term...
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