Lawrence Sports Working Capital Policy Paper
Currently Lawrence Sports has a working capital policy that just is not working. The purpose of having a policy is to ensure the company has sufficient cash flow in order to meet the short-term debt obligations and operating expenses. The following paragraphs will discuss some weaknesses in the current policy and produce suggestions for improvement. Along with the working capital policy will be a discussion on the ethical implications that businesses have when making decisions on how best implement a policy.
Working Capital Policy
“A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.“ (Investopedia, 2009) Currently Lawrence has an agreement with the bank to automatically borrow as needed to cover operating expenses and maintain a minimum cash balance of $50,000. The credit limit set by the bank is $1.2 million and any loan amount drawn will be repaid automatically at the end of each month. Unfortunately Lawrence’s prime customer, Mayo, has defaulted on the 80% outstanding payments from the previous two weeks and has notified Lawrence not to expect any money for another two weeks. In order to manage the week two cash position, Lawrence borrowed money from the bank and deferred payments to a supplier, Gartner for one week. These manipulations show a weakness in Lawrence’s working capital policy in the areas of cash balance requirements, credit policy, supplier negotiation strategy, short term financing and the metrics used to monitor the entire policy.&nb ...