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Conservative Approach

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Submitted By rbanks
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In its day-to-day operations, a firm must maintain adequate liquidity. At the same time, it wants to operate as efficiently and profitably as possible. In this regard, there is a risk-return trade-off in the alternative managerial philosophies about how working capital should be financed. Conservative approach is one method used to describe a firm’s philosophy about how it finances working capital (Emery, Finnerty & Stowe, 2007). Lawrence Sports will examine this policy to reduce future difficulties.

A conservative working capital policy may prove best to keep risk low. In a conservative plan, a company will typically match its business assets and liabilities in order to make sure the company will have the money to pay creditors. This approach involves the use of long-term debt and equity to finance all long-term fixed assets and permanent assets, in addition to some part of temporary current assets. To reduce risk, a business must also retain additional assets for the purpose of having money available for unforeseen circumstances. While the conservative working capital policy involves little risk, choosing it may mean the company has less money for business growth (wisegeek.com, 2013).

In the scenario, Lawrence Sports must deal with it principle customer, Mayo Stores and its default on 80% of the outstanding payments. Lawrence Sports must also keep bank borrowing and interest burdens as low as possible by negotiating short-term payment and collection arrangements with its suppliers, Gartner Products and Murray Leather Works. Lawrence must seek a positive cash balance to prepare of unforeseen emergencies. In the scenario, an unforeseen situation did occur which lead to a dispute and the abrupt end of business with Gersen warehousing company.

The current approach for the Lawrence Company is to offer Mayo Stores and extra week for paying or defer

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