OPPapers.com

Lawrence Sports Working Capital Policy Paper

Working Capital Policy
The goal of a company is to create value for its shareholders. In order to create this value, the company has to create a competitive advantage to exploit inconsistencies in the market in which it operates; both its trading and financial environments. As such, Lawrence needs to develop a comprehensive strategic, financial, and implementation plan to facilitate a successful Working Capital Policy, while fully leveraging existing resources and making their bottom line more profitable while managing risks and events that would threaten the success of the endeavor.

Working capital management involves decisions with regard to levels of cash, receivables, and inventory. Too much working capital is costly, reducing profitability and return on capital. However, too little can also be costly in terms of lost opportunities and the company may suffer increases in cost of capital due to too little cash if it cannot pay bills on time (Gilbert, and Reichert, 1995). Working capital policies involve a tradeoff between the risks of having too low a level versus the costs of having too high of one.
Financial strategy is defined as "having two components: the raising of funds needed by an organization in the most appropriate matter; and managing the employment of those funds within the organization" (Bender & Ward, 2002, p. 4). Lawrence's viability relies on its ability to successfully manage receivables, payables, and inventory. By reducing the amount of funds tied up in existing assets, Lawrence would be able to reduce financing costs.
Working capital is defined as "the difference between current assets and current liabilities" (Gilbert and Reichert, 1995). To determine cash requirements, Lawrence will need to build projections for accounts receivable, payables, and inventories. Lawrence will then need to compare their actual amounts to the figures they have forecasted. The increase in current liabilities (accounts payable) is then subtracted...