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Risks Associated to the Different Alternatives

In: Business and Management

Submitted By yerlis
Words 1032
Pages 5
First Alternative Working Capital Management Policy
Collecting account receivables is an indispensable step to keep the cash levels at the desired point while guaranteeing the inflows from the opened receivables. Collecting these accounts on time will allow Lawrence avoiding the dependency on the bank loans to keep up with short-time expenses. Through the implementation of a payment discount system, Lawrence can speed up collections. Offering a 3/10 net 30 payment discount, which means that the company offers a 3 percent discount within 10 days, with the remainder due in 30 days, will provide an incentive for early payment and increase cash inflow.
Risk Associated with policy
Utilizing payment discounts will provide an incentive for early payment; however the risk for Lawrence is that Mayo and other partners will not take advantage of the payment discount. Mayo and Lawrence’s other partners may want to have a high deferral period which can enhance a company’s cash conversation cycle. If a company pays its bills at the last possible moment while collecting cash quickly, the cash conversion cycle may be low and allow a company to have more cash.
Contingencies for Recommendation
If Mayo and other companies want to delay payment to enhance their company’s cash conversion cycle then Lawrence could institute a lock box system as a contingency. Lock boxes are methods to speed up cash collection while shortening mail times, processing times, and availability times. Lawrence should accomplish this by strategically locating them as close as possible to its business partners (Mayo, Gardner, and Murray).
According to the Journal of Finance, lock boxes increase the amount of funds available for investment by reducing the delay between the time the customer mails the check and the time funds are credited to the firm's account.

Second Alternative Working Capital...

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