Working Capital Management Worksheet

Working Capital Management Concepts Worksheet

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

Cash Conversion Cycle

Lawrence Sports had to borrow money from the bank to cover their outstanding accounts receivable, which was mainly sustained by Mayo, a primary business customer. It has an affect on the capital management. Their cash inflow is affected because any sales become accounts receivable before they become cash (Bayer, Myers, Allen, Ch. 31).

Lawrence sports did have a good relationship by making sure to pay there bills, even if it meant to stretch their payables, since Mayo is slowing paying on their outstanding account. "Of course, firms cannot literally hold a negative amount of cash. This is the amount the firm will have to raise to pay its bills" (Bayer, Myers, Allen, Ch. 31).

"Payments on accounts payable. You have to pay your bills for raw materials, parts, electricity, etc. The cash-flow forecast assumes all these bills are paid on time. Delaying payment is sometimes called stretching your payables, which is considered a short-term financing" (Brealey, Myers, Allen, Ch. 31).

Credit Policy on Cash Conversion Cycle

Lawrence Sports credit policy is not paying off, because the company has a large amount of outstanding account by Mayo, which are really not paying on their outstanding account. The company does have a good accounts payable in place, making sure they pay their bills to the suppliers who are satisfied at this time. The company needed management of receivables. "Establish the length of the payment period, decide the form of the contract with your customer, assess your customer's creditworthiness, establish sensible credit limits and collect. You need to be resolute with the truly delinquent customers" (Brealey, Myers, Allen, Ch. 30).

Term of Sale

Lawrence Sports have set up a credit account, with their primary customer, Mayo. But currently, this is not a good situation, because Mayo has not been making their repayment due dates. Lawrence may need to change their term of sale in the future with this customer. "A Seller may allow more extended payment if its customers are in a low-risk, if their accounts are large, if they need time to check their quality of the goods, or if the goods are not quickly resold" (Brealey, Myers, Allen Ch. 30). "To encourage customers to pay before the final date, it is common to offer a cash discount for prompt settlement. You have decided on the contract that customers must sign; and you have established a procedure for estimating the probability that they will pay up" (Brealey, Myers, Allen Ch. 30).

Credit Management-Commercial draft

Lawrence Sports will need to focus on their credit management, their accounts receivable needs to be stronger, so that they can collect on their services and products. Even if it means using a working

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