Working Capital Politics
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- Date Submitted: 08/13/2010 04:06 AM
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Working Capital Management
Name
FIN571/Corporate Finance
Date
Instructor Name
Lawrence Sports Working Capital Management
Lawrence Sports (LS) must manage the working capital to ensure the business will meet its commitments to customers, suppliers, and banks. To grow the business, LS will need to implement working capital polices that will reduce the financial difficulties it currently is experiencing. A concrete working capital policy will permit LS to grow and prevent future unexpected financial hardship and reduce risk. LS has a goal to succeed just as any other industry in the economic climate. The challenge is reviewing working capital policies and implementing one that works best to meet the organization’s strategic and financial goals.
Cash Conversion Cycle
Before a business can effectively manage cash flow, the cash conversion cycle (CCC) must be understood. “The cash conversion cycle is the length of time between the payment of accounts payable and the receipt of the cash from accounts receivable” (Emery, Finnerty, & Stowe, 2007, p. 643 ). The principle of time-value of money shows that any amount of cash today is worth more than a promise of cash in the future. LS should accept payments from customers when that customer cannot pay in full.
The LS data does not provide all the necessary artifacts to calculate its CCC. The three separate calculations which make up the CCC are 1) inventory conversion period, 2) receivables collection period, and 3) payables deferral period. Financial systems and information technology automates the calculations for inventory, receivables, and payables. Also required for the calculations are the cost of sales, and sales. LS’s wages, benefits, payroll taxes payable, and selling, general, and administrative expenses are not provided, but are essential in calculating the payables deferral period.
The CCC is an indicator of how efficiently a business is using cash to operate the business....
Name
FIN571/Corporate Finance
Date
Instructor Name
Lawrence Sports Working Capital Management
Lawrence Sports (LS) must manage the working capital to ensure the business will meet its commitments to customers, suppliers, and banks. To grow the business, LS will need to implement working capital polices that will reduce the financial difficulties it currently is experiencing. A concrete working capital policy will permit LS to grow and prevent future unexpected financial hardship and reduce risk. LS has a goal to succeed just as any other industry in the economic climate. The challenge is reviewing working capital policies and implementing one that works best to meet the organization’s strategic and financial goals.
Cash Conversion Cycle
Before a business can effectively manage cash flow, the cash conversion cycle (CCC) must be understood. “The cash conversion cycle is the length of time between the payment of accounts payable and the receipt of the cash from accounts receivable” (Emery, Finnerty, & Stowe, 2007, p. 643 ). The principle of time-value of money shows that any amount of cash today is worth more than a promise of cash in the future. LS should accept payments from customers when that customer cannot pay in full.
The LS data does not provide all the necessary artifacts to calculate its CCC. The three separate calculations which make up the CCC are 1) inventory conversion period, 2) receivables collection period, and 3) payables deferral period. Financial systems and information technology automates the calculations for inventory, receivables, and payables. Also required for the calculations are the cost of sales, and sales. LS’s wages, benefits, payroll taxes payable, and selling, general, and administrative expenses are not provided, but are essential in calculating the payables deferral period.
The CCC is an indicator of how efficiently a business is using cash to operate the business....