Lawrence Sports Working Capital Policy Paper

2323 words - 9 pages

Lawrence Sports is a $20 million revenue company that manufacturers and distributes sports equipment. The company's weekly cash budgeting is a balancing act between accounts receivable receipts and short-term financing. Typically this type of budget would not present many problems but in the case of Lawrence Sports, their working capital strategies are not optimized to maintain a positive cash budget. This paper addresses Lawrence Sports use of a cash budget to optimize their working capital strategies. The paper evaluates Lawrence Sports current working capital policies, suggests areas of improvement and provides metrics that the company can use to evaluate the policies effectiveness. Finally, the paper will analyze the ethical implications of the working capital policies to ensure Lawrence Sports is addressing the interests of all stakeholders. The paper begins with an overview of working capital management and the best practices or policies a company can institute to optimize working capital.Working Capital PolicyWorking Capital ManagementWorking capital management is the management of a company's finances from the beginning of the cash conversion cycle to the end. Working capital is the cash needed to run the day-to-day operations. The implementation of best practices helps to ensure a company's working capital remains a positive cash flow. The following are best practices as defined by REL Consult a company that specializes in working capital management and ensuring companies have the most efficient cash conversion cycle that is custom fit to their needs.•"Credit policies should be aligned with the company's strategic goals.•Payment terms should be minimized and adjusted to customer risk.•Billing processes should be streamlines and void of duplicity.•Collection procedures need to be proactive not reactive.•Build relationship with large revenue customers.•Dispute-resolution policies should be defined and handled efficiently.•Review recurring disputes and find the root cause so that it may be solved" (Schaeffer, 2005, p4).These best practices can be defined through policies negotiated by the company. First a company needs to evaluate their cash budget to determine the policies that will be most effective.Cash BudgetA cash flow budget is compiled from a projected income statement and a projected balance sheet. Cash inflows, account for all possible sources of income including tax refunds, grants, sales of assets as well as sales of goods and services. Cash outflows account for all operating expenses such as salaries and rent, debt and tax payments as well as the cost of the goods sold are included. The purpose of cash budgeting is to "identify the cash-flow gap on the cash-flow time line and help determine how much a company needs for short-term financing" (Ross, Westerfield, & Jaffe, 2005, p742). The budget can also show where cash and credit management policies can be manipulated to decrease the amount...

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