Working Capital Management Concepts Worksheet
University of Phoenix
Working Capital Management Concepts Worksheet
Concept Application of Concept in the Simulation Reference to Concept in Reading
Describe the firm’s cash conversion cycle.
In the example of the Lawrence Sports simulation the company showed that their primary source of cash inflow came from their largest customer Mayo. Other cash income came from their investment income and the use of their loan arrangement with their bank when needed. Their primary sources of cash outflow came from their payments to their suppliers Gartner and Murray. Other expenses included repayment of their bank loan and interest payments. Lawrence preferred to keep at least a closing cash balance of $50,000 at all times and so any disruptions in their cash inflow and outflow had a dramatic impact on this figure. This simulation gave very good examples of the types of situations that can happen and create a dramatic impact on a company’s inflow/outflow of cash. A prime example was the financial impact that a Lawrence faced when their primary source of cash, a key client defaulted on their credit payments. Cash inflow and outflow for a company is typically stated through their sources and uses statements. Sources are defined as activities that contribute to net working capital and uses as activities that use up working capital. Working capital is usually referred to as funds, and a sources and uses of funds statement is presented. Examples of sources for cash can include such things as issued long-term debt, reduced inventory, increased accounts payable and cash from operations. Uses of cash include things such as repaid short-term bank loan, invested in fixed assets, purchased marketable securities, increased accounts receivable and dividends (Brealey, Myers & Allen, 2005, pg.846-847).