Working Capital Policies
April 1, 2013
Lawrence Sports is a 20 million dollar company that manufactures sports equipment. Mayo is a major customer of Lawrence Sport's and has defaulted on 80% of the payments for goods and services for the weeks of March 17-23, and March 24-30 and Lawrence can’t expect any money from mayo until weeks April 14-20. Lawrence has borrowed money from the bank and has deferred payment to Gartner to manage the week of March 24-30 but the outstanding loan and the interest burden have gone up consequently (University of Phoenix, 2010). Team C is responsible for working capital management for the company and has come up with an alternate working capital solution and a plan to manage Lawrence's cash position in the forthcoming weeks. This paper will discuss the risk and contingencies associated with the alternate working capital solution. Performance measures will be discussed to show it will be used to evaluate and implement Team C recommendations for Lawrence Sports. Working Capital Policies
Team C will look at the following policies for working capital to see which one could be considered appropriate for Lawrence Sports. These policies are characterized by a combination of risk and return, and can have from a conservative to an aggressive profile. The three types of working capital policies most recommended and used are: Aggressive Policy, Average Policy, and Conservative Policy. The aggressive policy working capital management focuses on maintaining current assets amounts at minimum levels, which is reflected in the total asset turnover higher, with a higher margin. This policy emphasizes the aspect of returns on risk-return decision. This policy is the highest risk policy but with more funds to reinvest in the company or business. According to Kulkarni (2011) “ it is a high risk arrangement though, because, should your creditor come asking for money, and for some reason, you don't have enough money to pay them off, you might end up having to sell a costly asset to pay off your debt to them.” (Kulkarni, A. 2011 , Working Capital Policy, ¶9). The matching policy working capital management leaves a person with cash available to reinvest in his company or business. This policy entails a medium level risk and with this policy the business assets matched business liabilities. According to Kulkarni (2011) “this policy works in an arrangement where the current assets of the business are used perfect to match the current liabilities. It is a medium risk proposition and requires a good amount of attention.” (Kulkarni, A. 2011 , Working Capital Policy, ¶6).
A conservative policy working capital management focuses on maintaining a high liquidity, as well as other accounts assets, as inventories and accounts receivable, which is very expensive, because they remain idle resources that eventually become unproductive, with slow rotation of assets due to the large investment in current assets. This policy emphasizes the minimization of risk, as opposed to maximizing yields that is not risk to be sure liquidity. A conservative policy may be best for people who want to keep low risks. According to Kulkarni (2011) “This is the policy with the lowest risk, but it reduces the money used in increasing the production” (Kulkarni, A. 2011 , Working Capital Policy, ¶11). Recommended Policy
The working capital policy recommended for Lawrence Sports is the matching policy, more commonly referred to as the moderate approach. The working capital is funded by short and long term borrowing, equity financing or a combination of them. It is vital for the company to balance the risk and return of financing. The moderate approach falls in between the two other polices described above and is the most balanced. This enables Lawrence Sports to balance its risk and returns. Furthermore, it finances short...
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