Lawrence Team Essay
Working capital management is very important in running a business because it involves managing all current assets and liabilities. Working capital management involves making appropriate investments in cash, marketable securities, receivables, and inventories, as well as the level and mix of short-term financing (Emery, Finnerty, Stowe, 2007, p. 639, para. 3). Currently Lawrence sports, a multi-million dollar company that manufactures and distributes sports equipment is seeking a way to better manage its’ capital, lower loan burdens, and undertake better business deals with its’ three business partners. Management can solve this issue with working capital policies that reduce future difficulties.
Alternative Working …show more content…
The conservative approach deals directly with using only “long-term financing…to finance all of the firm’s long-term assets, all of its permanent current assets, and some of its temporary current assets.” (Emery, Finnerty & Stowe, 2007) The conservative approach is more likely to yield larger positive cash balance due to financing on a long-term basis. A possible downside to having a too large of a cash balance is forfeiting possible investing opportunities to grow existing funds.
The aggressive approach to financing working capital is a bit more risky than the maturity or conservative approaches. This approach deals less with long-term financing and more with short-term funds with a goal of increasing profitability with risk-taking. The approach uses “the Principle of Risk-Return Trade-Off that without some sort of market imperfection, higher expected profitability comes only at the expense of greater risk” (Emery, Finnerty & Stowe, 2007) or more simply said, the greater the risk, the larger the return.
Evaluation of the Risk Associated with the Recommendation
After a careful review of each type of new financing working capital, Lawrence Sports has