Lawrence Sports: Working Capital Strategies

RUNNING HEAD: Working Capital Strategies Research

University of Phoenix

MBA550

January 21, 2008

Introduction

In order for a business to be successful and stay profitable, the company should understand the concepts of working capital management and apply them strategically. The concepts are simple; however, the difficulty occurs when companies have to measure the progress of the working capital process and make adjustments as needed. The issue is sometimes difficult to see immediately. Some working capital management issues may fall into the categories of cash budgeting, cash flow analysis, best practices, ethical implications and strategic risks and opportunities. While these are all part of the working capital process, each is important as a stand alone in making the company successful. This paper will discuss these concepts and review several companies who had issues in these areas and how each responded.

Class Concepts

Cash Budgeting / Cash Flow Analysis

All businesses need cash. They use it to purchase inventory and pay bills, among other things. The problem many companies such as Lawrence Sports have is that cash is not guaranteed to be there when needed. Lawrence Sports has a $1.2 million credit line with a local bank. The arrangement is set up so that whenever funds drop below the $50,000 minimum balance, funds are automatically deposited from the credit line. Repayment must occur during the last week of the month. The only way Lawrence Sports is able to assess the firm’s cash needs is by understanding what cash is coming in and out. That is why a cash flow analysis and a cash budget are such integral parts of short-term financial planning. A cash flow analysis requires an understanding of the operating cycle, or “the time interval between the arrival of inventory stock and the date when cash is collected from receivables,” and the cash cycle, which “begins when cash is paid for materials and ends when cash is...