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Working Capital Concepts

Working Capital Management Concepts
Shawn Blakeley
MBA 550 – Working Capital Management
University of Phoenix
June 11, 2008


Working Capital Management Concepts Worksheet
Concept Application of Concept in Scenario Reference to Concept in Reading
Describe the firm's cash conversion cycle.
In the scenario, Lawrence Sports considered two of the four main categories of cash outflow on a week-to-week basis. 1. Payments on accounts payable was constantly analyzed and negotiated to both Gartner Products and Murry Leather Works. 2. Labor, administrative, and other expenses were represented as operating expenses. These two categories were fairly easily and quickly adjusted to achieve the desired short-term result. The other categories: 3. Capital expenditures and 4. Taxes/interest/dividend payments were not adjusted on a week-to-week basis. However, these categories certainly play a vital role in achieving yearly or long-term outcomes. Since these categories are not easily or quickly adjusted, they were not considered in the scenario. Four main categories of cash outflow:
“1. Payments on accounts payable. You have to pay your bills for raw materials, parts, electricity, etc. The cash-flow forecast assumes all these bills are paid on time, although Dynamic could probably delay payment to some extent.
Delayed payment is sometimes called stretching your payables. Stretching is one source of short-term financing, but for most firms it is an expensive source, because by stretching they lose discounts given to firms that pay promptly.
2. Labor, administrative, and other expenses. This category includes all other regular business expenses.
3. Capital expenditures. Note that Dynamic Mattress plans a major capital outlay in the first quarter.
4. Taxes, interest, and dividend payments. This includes interest on presently outstanding long-term debt but does not include interest on any additional borrowing to meet cash requirements in 2005” (Brealey, Myers & Allen,...