Working Capital Management Concepts Worksheet

ConceptApplication of Concept in the SimulationReference to Concept in ReadingShort-term financing“Whenever there is a cash deficit situation, money will be borrowed automatically from the bank to tide over it and to maintain a minimum cash balance of $50,000. The maximum credit limit is $1.2 millions. At the end of each month, the loan will be repaid automatically, after retaining $50,000” Options for Short-term financing: Bank loan: Dynamic has an existing arrangement with its bank allowing it to borrow up to $38 million at an interest cost of 10 percent a year or 2.5 percent per quarter. The firm can borrow and repay whenever it wants to as long as it does not exceed its credit limit.

Companies sometimes wait until they need the money before they apply for a bank loan, but nearly three-quarters of commercial bank loans are made under commitment. In this case the company establishes a line of credit that allows it to borrow from the bank up to an established limit.

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(Brealey, Myers, Allen, 2005)Credit Manager and working capital.

“Lawrence Sports is a $20 million revenue company that manufactures and distributes sporting goods. Lawrence’s principal customer is Mayo, which is the world’s leading retailer. Mayo is experiencing difficulties in repaying Lawrence, which is caused pressure from Lawrence” (University of Phoenix, 2009). The credit manager of Lawrence Sports should set a short-term payment and collection arrangement plan with Mayo to collect the debt from Mayo instead of pressuring them to pay as Mayo accounts for 95% of Lawrence Sports sales and losing them would mean that LS would go out of business. This will also help LS with maintaining a reasonable cash flow and keeping them out of negative working capital.“The Company’s Credit Manager sets the terms for payment, decides which customers should be offered credit,