Lawrence Sports Working Capital Policy

Lawrence Sports Working Capital Policy

FIN/571

August 6, 2012

Helen Brown-Horton

Lawrence Sports Working Capital Policy

The art of working capital management is much like juggling. A manager handling day-to-day cash of a company has to balance many things like collections, bad debts, disbursements, future revenues, borrowing, and loan repayment simultaneously. Lawrence Sports demonstrates what it is like to juggle with cash inflows in good times and bad. Any changes that occur with the working capital available to Lawrence Sports consequently will directly influence their suppliers, which are Gartner Products and Murray Leather Works. Lawrence Sports managers in charge of customers and vendors are constantly negotiating for better collection and payment schedules. In addition, attention is given to how each decision made affects not only the company’s cash flow, but the cash flow of the partners as well (University of Phoenix, 2012, Week Two Web Link).

Three Alternative Working Capital Policies That Reduce Future Difficulties

Aggressive Approach

An aggressive policy with regard to the level of investment in working capital means that a company chooses to operate with lower levels of inventory, trade receivables, and cash for a given level of activity or sales. An aggressive policy will increase profitability because less cash will be tied up in current assets, but it will also increase risk because the possibility of cash shortages or running out of inventory is increased.

Conservative Approach

A conservative and more flexible working capital policy for a given level of turnover would be associated with maintaining a larger cash balance, perhaps even investing in short-term securities, offering more generous credit terms to customers and holding higher levels of inventory. Such a policy will give rise to a lower risk of financial problems or inventory problems, but at the expense of reducing profitability.

Moderate Approach...