The Lawrence Sports Simulation Research Paper Example | Topics and Well Written Essays - 1500 words

The Lawrence Sports Simulation - Research Paper Example There must be: three alternative working capital policies which reduce future difficulties; a recommendation on policy and an evaluation of risk associated with the recommendation; contingencies for the recommendation; performance measures used to evaluate the recommendation; an implementation plan for the recommendation; a discussion and explanation of the recommendation; a review of the cash conversion cycle for Lawrence Sports; an explanation of the importance of the cash conversion cycle to its working capital management; and a conclusion. II. Three Alternative Working Capital Policies Which Reduce Future Difficulties There are three working capital policies which have to be put in place in order to reduce future difficulties as a company. First and foremost, Lawrence Sports must realize that it can’t make more payments than purchases—as it started to do the week of March 31st—and expect to make a profit. Therefore, the company must make a policy to ensure th at it is always taking in more money than it is spending. The second thing that Lawrence Sports must do is ensure that all of its vendors are paid in full without leaving capital build up in order to pay off its debts. For example, it was mentioned that Gartner was paid off 40% upfront, and then 60% in the next week. This should not be so. Debts should be paid off quickly and not be allowed to pile up. The same thing happened with Murray, when 15% was paid immediately, with 85% to be paid in the next week—where payments started taking over purchases also during the week starting March 31st. Third, what is most important is that Lawrence try to have a cash inflow total that is at least anywhere from 25 to 50% greater than its outflow. This is just to ensure that the cash inflow does not get too far below so that outflow is not greater, and is a safety measure. III. Recommendation A. The Recommendation on Policy Itself and An Evaluation of Risk Associated With the Recommendatio n The recommendation made to Lawrence Sports is to do some cash flow analysis—and to emphasize simply having greater cash flow coming in than going out. According to Grier (2007), â€Å"Cash, not earnings, allows a business entity to meet its financial obligations. Indeed, assessing the amounts, timing and uncertainty of cash flows is one of the basic objectives of financial reporting and analysis† (pp. 47). This policy will help the company stay solvent. However, this also means that the company has to pay its debts off quickly to these outsourced businesses which provide its products. According to Kakkar (2009), â€Å"[One should] [r]educe credit allowances and accelerate cash receipts†¦Ã¢â‚¬  (pp. 234). By reducing the amount of credit used and upping the cash receipts for accounts receivable, this will increase the cash inflow and minimize the risk of coming in below the 25% profit margin that was discussed as one section of the three policy alternatives for the company. This is why cash flow is so important. According to Fight (2005), â€Å"Analysis of cash flow, then, cannot merely isolate debt capacity but must also consider all the factors producing major changes in cash inflows and outflows† (pp. 6). Of course, the risk is that by focusing too much on cash flow, the company will neglect other areas. However, this issue is so important because it is what will make or break the company—eventually—is whether or not its ledgers are balanced. B. Contingencies For