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Working Capital Management Concepts Worksheet

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Running Head: WORKING CAPITAL CONCEPTS

Working Capital Management Concepts Worksheet

MBA550

University of Phoenix

Working Capital Management Concepts Worksheet

Concept Application of Concept in the Simulation Reference to Concept in Reading

Cash inflow, outflow and 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.” (Loan universe, 2008) “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)

Collection and or credit policy on cash conversion cycle and revenue

During the simulation, the company did not appear to have a clear collection policy which could create problems for LS. Consequently, Lawrence Sports is facing cash flow challenges during the cash budget year. LS will need to pay their bills during times when the cash inflow is insufficient to pay the supplier bills. This means Lawrence Sports needs credit to make payments to their suppliers (cash outflow) while waiting for payment from customers. Lawrence Sports needs to have credit policies that support the business through timely payments from their customers so the company maintains a good position of credit worthiness and a cash supply for unexpected monthly events. “Look beyond the immediate order, maximize profit and concentrate on the dangerous accounts. The credit decision is a dynamic problem. The final step in credit management is to collect payment.” (Brealey, Myers, Allen, 2005)

Bank loans вЂ" effects of accounts payable

Lawrence Sports needed to make a bank loan for monies owed to their suppliers. The accounts payable for LS is the money owed on the bank loan and money to the suppliers. The cost of sale includes the gost of goods sold, internal resources and financing terms and lay payments. The company needs to make sure that the cash conversion cycle is timely enough to address the accounts payable outflow of cash. Therefore, short term

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