INTRODUCTION
Lawrence Sports, a company with $20 million in revenue, has to create a working capital policy that addresses their cash management needs for the long term. In the following paragraphs, cash balance requirements, credit policy, negotiating strategies, short-term financing, and monitoring metrics will be defined. Lastly, ethical implications and conflicting interests of stakeholders will be discussed.
Cash Budgeting
Cash budgeting allows managers to forecast the inflows and outflows of cash over time between balance sheet dates. Assumptions that are made with cash budgets are that the inflows and outflows of cash occur evenly over the month. “The purpose of the cash budget is to forecast the timing and magnitude of expected cash deficits and surpluses so that, before the fact, the manager can arrange appropriate financing or plan an appropriate investment strategy” (Cash flow cycle…, n.d., p. 24).
Throughout the Lawrence Sports simulation, the Finance Manager has to balance payables and receivables on a weekly basis to ensure the company’s cash does not fall too short and to ensure that the loan with Central Bank is kept to a minimum. Lawrence has negotiated terms with its customers and vendors that allow inflows and outflows of cash to be stretched over several periods. Decisions for the management of each account are based on the input of the account managers, who know the position of their accounts best, and the CFO.
In comparing Lawrence Sports’ use of cash budgeting to the purpose of cash budgeting, one difference that is apparent is that Lawrence does not spread the outflows or inflows of cash evenly over the period. For example, for customers, Mayo is expected to pay 20% upon their purchases and the remaining 80% in the following week. For vendors, Lawrence pays Murray Leather Works 15% upon purchase of materials and the remaining 85% in the following week and Lawrence pays Gartner Products 40% upon purchase of...