Working Capital Concepts
WORKING CAPITAL CONCEPTS
Working Capital Concepts
University of Phoenix
Working Capital Management Worksheet Assignment
Concept Application of Concept in the Simulation Reference to Concept in Reading
Cash Conversion Cycle Lawrence Sports' cash conversion cycle is made up of the $20 million in revenue it receives for manufacturing and distributing equipment and protective sporting gear. Lawrence Sports generates its revenue by purchasing material from their vendors and selling the materials to their customer. Cash inflows and outflows are generated through the collection of accounts receivables from the customer, and making payments to the suppliers. Describe the firm's cash conversion cycle."Sales become accounts receivable before they become cash. Cash flow comes from collections on accounts receivable. Most firms keep track of the average time it takes customers to pay their bills. From this they can forecast what proportion of a quarter's sales is likely to be converted into cash in that quarter and what proportion is likely to be carried over to the next quarter as accounts receivable" (Brealey, Myers, and Allen, 2005).
Effects of credit policy on cash conversion cycle and revenue. The Cash Conversion Cycle is one of the tools credit analyst use to determine credit worthiness. Credit analyst want to know why the business needs more cash to operate, and when and how it will be able to repay the cash. Lawrence Sports needs credit to make payments to their suppliers while awaiting payment from their customer, while still having money on hand. If Lawrence Sports attempts to borrow money from a firm with a strict credit policy, they many not get the loan or may get a loan with less than favorable terms. Lawrence needs to put policies in place to ensure timely payment from their customer in order to keep the company in a position of credit worthiness. Effects of credit...
View Full Essay