Concept Application of Concept in the Simulation Reference to Concept in Reading
Cash Conversion cycle or Cash cycle
In the simulation Lawrence Sports’ (LS) cash cycle is the $20 million in revenue from manufacturing, distribution and protective sporting gear. The cash inflows and outflows are created through accounts receivables from the customer then making payments to the suppliers. LS generate revenue by purchasing material from vendors and selling the materials to the customer
“The Asset Conversion Cycle usually referred to as the Cash Conversion Cycle or Cash Cycle is an important tool analysis that allows the credit analyst to determine more easily why and when the business needs more cash to operate, and when and how it will be able to repay the cash.” (Brealey, Myers, Allen, 2005)
Terms of sale
Lawrence Sports need to set up a credit account with their primary customer, Mayo. However, Mayo has not been meeting their repayment due dates. Lawrence may want to change their term of sale for future purchases,
“A seller may allow more extended payment if its customers are in a low-risk, if their account is large, if they need time to check their quality of the goods, or if the goods are not quickly resold”. “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, 2005)
Lawrence Sports' (LA) current credit policy is not catering to the needs of the company. LA's credit policy is too lenient, and there is no money coming into the company. The company's working capital minimum requirements are not being achieved. In addition, it has a direct effect on the LA's cash conversion cycle because cash is constantly paid for materials but not collected from receivables. LA will need to implement...