Working Capital Management Concepts Worksheet
Concept Application of Concept in the Simulation Reference to Concept in Reading
Cash Inflow/Cash Outflow
Lawrence Sports (LSI) faced a couple very difficult challenges with their cash inflow that inhibited its ability to make payments to their suppliers or cash outflow. The cash conversion cycle for LSI was not thoroughly thought out. The cash conversion cycle is the difference of time between delivery of goods or service and the collection of the payment. There was only one plan in place that helped them with this situation and that was to obtain a loan which also placed increased pressure on the company.
The cash flow is just the difference between dollars received and dollars paid out. The company must ensure that there is a proper cash inflow to cover its cash outflow. Budgeting and forecasting are tools that enable a firm to plan and account for future cash flow. “Cash in-flow comes from collections on accounts receivable.” Cash outflow is simply “paying your bills” (Brealey, Myers and Allen, 2005, p. 849)
Credit Policy and Loans
LSI has a line of credit with a bank. When the company is low on cash money is borrowed to maintain a cash balance of $50,000. The Interest rate for the line of credits is incremental. As the dollar borrowed increases so does the interest rate.
A bank loan can be used as a part of a short term financing plan. A firm can borrow and repay whenever it wants as long as it does not exceed its financial limit (Brealey, Myers and Allen, 2005). Banks are not the only source of loans. Finance companies are also a major source of ...