Running head: WORKING CAPITAL MANAGEMENT CONCEPTS WORKSHEET
Working Capital Management Concepts Worksheet
Working Capital Management Concepts Worksheet
Concept Application of Concept in the Simulation Reference to Concept in Reading
Cash inflow, outflow, and conversion cycle or cash cycle
Lawrence Sports’ (LS) cash cycle is the $20 million in revenue from manufacturing, distribution and protective sporting gear (University of Phoenix, 2008). The cash inflows and outflows are created through the receipt of accounts receivables from organizational customers and afterwards, making payments to the suppliers. LS generate its revenue by purchasing material from vendors and selling the materials to current and prospective customers. “Sales become account receivables before they become cash. Cash flow comes from collections on accounts receivables. Most firms keep track of the average time it takes customer to pay their bills. From this they can forecast what proportion of a quarter’s sales is likely to be converted into cash in that quarter and what proportion is likely to be carried over to the next quarter as accounts receivable.” (Brealey, Myers, Allen, 2005, p. 849).
Collection and or credit policy on cash conversion cycle and revenue
The company does not have a clear collection policy which in turn, can create problems for LS. Consequently, LS faces problems with cash flows during the year. LS must continue to pay supplier bills and operational expenses during times when the cash inflows are insufficient. Therefore, LS will need additional credit from their credit line at Central Bank to make payments to suppliers (cash outflows) while awaiting customer payment (cash receivables). LS must have a set of credit policies in place. This policy will support the business through timely customer payments in order for LS to maintain a good standing in credit with its vendors and suppliers, and a cash supply for unforeseen events. “Look beyond the...