Working Capital Management

Working Capital Management Concepts Worksheet

University of Phoenix

Working Capital Management Concepts Worksheet

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

Working Capital

Lawrence Sporting Goods (LS) has to manage their short term assets and liabilities with their suppliers and customers. With their current credit policy their customers have been making partial payments by credit which delay the accounts receivables to convert to cash; on the other hand, LS buys the raw materials on credit when the cash available is below a certain threshold. LS has to manage the speed of the cash inflow and pay the bank before interest accrues which could result in a capital loss. “Short term, or current, assets and liabilities are collectively know as working capital. When current assets are larger than current liabilities net working capital is positive” (Brealey, Myers, & Allen, 2005).

Accounts receivable financing LS allows Mayo to pay to on credit which show up on the financial statement as accounts receivable. The main problem in this scenario is the length of time it takes to convert to cash.

Chanin (2006) describes how ”restaurants traditionally have been turned down for loan because they are considered a cash business. As a result, many restaurants have turned to alternative funding sources; such as, commercial finance companies, factoring companies, pension funds, venture capital, insurance companies, and credit card companies. These alternative finance companies are not held to the strict credit stands by federal and state regulators like banks” (p.24). “Companies frequently sell goods on credit, so that it may be weeks or even months before the company is paid. These unpaid bills are shown in the accounts as receivables” (Brealey et al.,2005).

Accounts receivable financing involves either assigning receivables of factoring receivables. Under assignment the leander has...