Finance Essay

These policies are characterized by a combination of adventure and fall, and can have from a conservative to an aggressive profile. The three types of works not bad(p) policies most recommended and used are Aggressive Policy, Average Policy, and standpat(prenominal) Policy. The aggressive polity work bang-up management focuses on take foring present-day(prenominal) assets bills at minimum trains, which is reflected in the total asset turnover higher, with a higher margin. This polity emphasizes the aspect of returns on assayiness-return decision. This constitution is the highest essay constitution but with more finances to reinvest in the participation or usiness. harmonise to Kulkarni (2011) it is a high risk exhibition though, because, should your creditor come asking for m aney, and for some reason, you dont have enough funds to relent them off, you business leader end up having to sell a costly asset to pay off your debt to them. (Kulkarni, A. 2011 , Wor king Capital Policy, 9). The interconnected policy working detonator management give ups a person with cash available to reinvest in his company or business. This policy entails a medium direct risk and with this policy the business assets matched business liabilities.According to Kulkarni (2011) this policy works in an arrangement where the true assets of the business are used perfect to match the up-to-the-minute liabilities. It is a medium risk proposition and requires a good amount of attention. (Kulkarni, A. 2011 , Working Capital Policy, 6). A conservative policy working capital management focuses on maintaining a high liquidity, as well as other accounts assets, as inventories and accounts receivable, which is very expensive, because they remain idle resources that eventually buy the farm un fruitive, with slow rotation of assets due to the large investment in current assets.This policy emphasizes the minimization of risk, as opposed to maximizing yields that is not r isk to be sure liquidity. A conservative policy may be best for people who want to keep low risks. According to Kulkarni (2011) This is the policy with the lowest risk, but it reduces the money used in increasing the payoff (Kulkarni, A. 2011 , Working Capital Policy, 11). Recommended Policy The working capital policy recommended for Lawrence Sports is the matching policy, more commonly referred to as the curtail approach.The working capital is funded by short and languish name borrowing, equity financing or a combination of them. It is vital for the company to balance the risk and return of financing. The moderate approach falls in between the two other polices exposit above and is the most balanced. This enables Lawrence Sports to balance its risk and returns. Furthermore, it finances short term debt with temporary assets while permanent and fixed assets are financed by long term debt and equity sources (Zeepedia, n. d. ).A moderate approach gives Lawrence Sports the ability to maintain the relationships necessary to continue business, balance the working capital to still require a profit, and repay what is owed to the bank. Figure 1. Different Policies Regarding the Level of Investment in Working Capital demonstrates how the Moderate Approach compares with the others in terms of the level of investment in working capital (Watson amp Head, 2012, p. 72). Risk It is beta for a company to choose the best working capital policy, one that features a level of risk the company can handle.Team C decisions about working capital management are being impelled by the intrinsically related priority of risk management. Team Cs aim is to minimize the risk of insolvency while maximizing the return on the assists (Dixon, 1991). Teams C choose the matching working capital policy because it entails a medium level of risk and it will also leave Lawrence Sports with more cash to reinvest in the business. Lawrence Sports will keep low levels of working capital so that the y can employ the funds more productively elsewhere like purchasing more goods or more machinery.It is a relatively amount of risk balanced by a relatively moderate amount of expected return. The best level of working capital would be the one in which a balance is achieved between risk and efficiency which also requires continuous monitoring to maintain proper level in various components of working capital, i. e. , cash receivables, inventory and payables, etc. Contingencies A contingency is an unexpected event or situation that affects the financial health, maestro image, or market share of a company. It is usually a ostracize event, but can also be an unexpected windfall much(prenominal) as a huge severalise.Anything that unexpectedly disrupts a companys expected operation can harm the company even if the tumult is because of a windfall (Duff, 2013). In the case of Lawrence Sports there should be a contingency plan in place in the event product is damaged or lost either in t ransit or by some unforeseen event. Another contingency plan Lawrence Sports should roll is a cash reserve to cover accounts receivable loses if mayonnaise defaults on invoice credits. In this case vendor defaults affect bottom credit line but in turn Lawrence would not have to borrow money from Gartner and avoid high interest rates.For Lawrence to recover from such an incident Lawrence Sports necessarily to use its working capital to cover the costs so that funds are not continuously incurred on the bank loan. In order for Lawrence Sports to raise the capital to cover a contingency plan Mayo would have to relinquish all sales to Lawrence Sports, payments to Gartner will have to be stretched out further and Murray would lose working capital and halt operations because Lawrence Sports payments would be differed even longer. These hefty decisions are all apart of risk management and can negatively affect business relations.