Working Capital Management Concepts Worksheet
Working Capital Management Concepts Worksheet
Concept Application of Concept in the Simulation Reference to Concept in Reading
Cash Conversion Cycle
In the Lawrence Sports (LS) simulation, the company’s cash inflow comes from the selling of sporting goods. LS receive the majority of their cash receivables from Mayo. One of LS cash outflows are accounts payable. These account payable includes their vendors Gartner and Murray (UOP, 2009).
The cash conversion cycle includes cash inflow and outflow. “Cash flow comes from collections on accounts receivable” (Brealey et al, 2005). Cash inflow is the net amount of cash that a company receives from operations. The cash inflow is represent by the revenue. Cash outflow is the net amount of cash that a company disburses from operations. The cash outflow is the company’s expenses. These expenses include account payable, labor, administrative cost and taxes (Brealey et al, 2005). “Cash flow comes from collections on accounts receivable” (Brealey et al, 2005).
Examine the effects of credit policy on cash conversion cycle and revenue
LS has a bank line of credit of $1.2 million dollars that they can use for cash outflow and to main a cash on hand amount of $50,000 (UOP, 2009). LS can repay the line of credit whenever it wants to as long as it does not exceed its credit limit.
LS must pay close attention to the amount of time it takes Mayo to pay them and they amount of time they pay their vendors Gartner and Murray. This collection period will determine the credit policy for LS. LS may want to give Mayo a cash discount for paying early. During the simulation LS give Mayo, Gartner and Murray various collection periods. For example, LS give Mayo additional weeks to pay and offered their vendors splits or progression on payments (UOP, 2009)
If LS is in default with their suppliers, the suppliers’ cash inflow is comprise. Just like LS, the suppliers count on...