IntroductionMaintaining the correct balance of working capital is imperative for a company to successfully maintain sales and profits while also keeping enough cash in reserve to take advantage of business opportunities when they arise. Lawrence Sports is trying to utilize working capital strategies that satisfy company stockholders, the board, and company partners. An exploration of the practices of other companies and how they can apply to the situations faced by Lawrence Sports will be conducted.
Working Capital Strategies For Long-Term OpportunitiesThere are many effective ways to manage capital, most companies rely on a mix of short-term financing, accounts receivable, and effective management techniques to maintain liquidity.
The most common working capital strategy is for the company to maintain a line of credit with a bank or other lending institution. A line of credit will allow the company to receive funds and incur interest charges only when necessary. Some companies also utilize a system called stretching payables to temporarily increase working capital.
This process requires the company to pay very close attention to the early payment discounts and late fees required by their vendors. The company neither wants to lose a profitable discount nor incur a hefty late fee. They do, however, want to temporarily delay payment to their vendors, allowing them to utilize the cash for a while longer before handing it over to pay a vendor obligation. Another successful working capital strategy is to carefully maintain inventory preventing a deficit that limits sales and an overage, which leads to expensive products collecting dust rather than producing profits. Finally, many companies have successfully renegotiated or amended credit terms to free up working capital. A line of credit can be increased or its terms renegotiated, and both measures will result in increased working capital.
Purpose Of Cash Budgeting"It's a challenge for...