PAGE 1 Working Capital Worksheet
Working Capital Management Concepts WorksheetMBA 550 WK 1University of Phoenix
"A credit policy is the blueprint used by a business in making its decision to extend credit to a customer. The primary goal of a credit policy is to avoid extending credit to customers who are unable to pay their accounts. The credit policy for some larger businesses can be quite formal, involving things such as: specific documented guidelines, customer credit applications, and credit checks" (toolkit, 1995). The credit policy currently in place at Lawrence Sports could cause difficulties for the company since their current policy did not meet the needs of the organization. Minimum, requirements for working capital has not been achieved which has negatively affected the company's cash flow given that materials are being bought by cash while cash inflow for receivables are not coming in.
Lawrence Sports would need to create a policy that would directly impact the company's cash flow. "A credit policy that is too strict will turn away potential customers, slow sales, and eventually lead to a decrease in the amount of cash inflows to your business. On the other hand, a credit policy that is too liberal will attract slow paying (even nonpaying) customers, increase your business's average collection period for accounts receivable, and eventually lead to cash inflow problems. A good credit policy should help you attract and retain good customers, without having a negative impact on your cash flow" (toolkit, 1995). According to the Business Owners Toolkit, some of the questions that should be on the forefront of the companies mind are:
Which types of credit do you want to offer?
To whom do you want to offer credit?
How much credit do you want to offer?
"As you create your policy, consider the link between credit and sales. Easy credit terms can be an excellent way to boost sales, but they can also increase losses if customers default. A typical credit policy will address the following points" (Entrepreneur, 2009).
Terms of sale
"In any sales agreement, it is important that there is a common understanding of the delivery terms since confusion over their meaning can result in a lost sale or a loss on a sale" (Unzco, 1998), In the stimulation, Mayo, one of Sports primary customers was set up on terms of sale. However, by not meeting the due dates for repayments Lawrence Sports must now renegotiate terms of sale that will keep cash inflow. Mayo's plans of deferring their payments instead of paying on their credit accounts will create many obstacles for Lawrence Sports; therefore, it is essential for Lawrence Sports to also manage the number of cash outflows as well.
"To encourage customers to pay before the final date, it is common to offer a cash discount for prompt settlement. You have decided on the contract that customers must sign; and you have established a procedure for estimating the probability that they will...