a Operating business with a balance in capital management is essential to every business whether small or large. A constant vigil over how much money comes in and how m uch money goes out, as well how much money is tucked away must be maintained. A business could find itself at a production standstill or even bank ruptcy because of a lack of cash. A vital tool in an effective capital working policy is cash budgeting. A cash budget is a way to monitor a businesses cash in flows and outflows, which in turn assist in predicting a company's ability to pay debt, expenses and can be used in planning short-term credit, needs (Score, 2007). Dicks sporting goods has a credit line with high interest rates. The company is in a constant state of worry in regard to paying off the loan without borrowing any more money. The impact is felt amongst the company's customers and suppliers. Dicks sporting goods relies on on-time payments from the customer, stretched out payments to the suppliers and a credit line with high interest rates. The company appears to act more out of panic versus long termed planning that can help maintain control over the finances. D icks sporting goods needs to monitor the t ime between cash in flows and cash outflows. For example: Since Dicks sporting goods main cash source is from Mayo, Dicks sporting goods needs to monitor how long i t takes from the time materials are ordered for Mayo and how long it takes for Mayo to make the final payment. A cash budget would assist in showing w hen cash is needed to pay bills. If the bill is due before payment is received, then that could indicate a need for financing until payment is received. Dicks sporting goods can then t ry to negotiate payment terms with customers and suppliers to strike a balance between t he inflows and outflows and rely less on short-term financing to pay the bills until the f inal payment ar rives. A relationship with the company's suppliers and the company's creditworthiness are put in jeopardy with too many late payments. Viewing a cash budget can help the leaders of Dicks sporting goods view where the issues and opportunities are located and free up working capital. Working capital comprises of current assets that have yet to be liquidated. The average fi rm has about 40 % of its working capital tied up in current assets (Maysami, 2007). The focal point of any good working capital policy is to free up cash so the cash can be used to further g row the business (Myers, 2006). Dicks sporting goods' working capital policy appears too casual. The company finances all shortages with the line of credit. The credit terms with M ayo are 20% collection upon ordering and 80% in the following week. The credit terms w ith Gartner (supplier) are 40% payment upon purchase and 60% the following week. The credit terms with Mu r ray (supplier) are 15% payment upon purchase and 85% the following
week. According to the simulation (2007), inventory is kept at a minimal because when D icks sporting goods had to replace a shipment, new parts were ordered to fill the r eplacement order. Dicks sporting goods appear to have some agreements, but it appears as t hough they are not kept. At the r isk of not upsetting the company's largest customer, the credit terms are probably relaxed often. In two weeks, 100% of the payment is due from M ayo. However, if Mayo does not pay, Dicks sporting goods has a tough t ime paying the suppliers and will delay paying the bill. This is a vicious cycle that may have suppliers leave D icks sporting goods. D icks sporting goods can t ry to negotiate a new payment strategy to help reduce such large payments in a short amount of t ime. Incentives for on-time payments can be an option to encourage Mayo to pay on t ime. Dicks sporting goods can also seek cheaper short-term f inancing to use for cash reserves. Dicks sporting goods currently uses a line of credit as a cash reserve along with a maintained bank balance of $50,000. Operating cost alone is $100,000 a week and currently the line of credit is almost to the max. A few hard weeks and D icks sporting goods might go into bankruptcy. I t is imperative the company maintain the l ine of credit in good standing as this is the company's cash reserve for now. Cash reserves a re what a company needs when cash f low dips (Gray, 2006). Enough cash should be kept to f inance operating expenses that must be paid, even if the company made no sales. In the simulation (2007), two weeks go by in which nothing is sold. This can be an indicator that t he business experiences seasonal periods of slow business. Dicks sporting goods needs to be prepared. Several methods exist that can be used to help reduce the company's need to d ip into the cash reserves until absolutely needed. The company can cut overhead; cutting something that is not pertinent to the business can save cash. Closer monitoring of i nventory such as deleting i tems that are no longer selling can be a way to free up cash. F inancing long-term assets instead of using cash for i tems such as machinery or computers conserve can cash by making smaller payments. Fi rmer credit collection policies can also r educe the cash conversion cycle. Short-Term Financing One of the issues Dicks sporting goods faces is the interest rate with the line of credit. T he more money used from the line of credit the higher the interest rate. In the simulation (2007), the company has almost reached the maximum available. If the company were to experience a crisis and needed quick cash, the survival of the company could be in jeopardy. A few guidelines can help Dicks sporting goods keep the interest charges to a minimum.
1. Use of Trade Credit: Trade credit is a source of short-term financing Dicks sporting goods a lready uses but negotiations for longer net terms should be pursued. Any discount rate may be lost but it would be cheaper than loan. 2. Use of Long-Term loans: Long-term loans should be used for long-term assets such as equipment, machinery and computers instead of the credit line. The more Dicks sporting goods charges, the higher the interest rate. 3. New Banks: Dicks sporting goods should shop around for the best interest rates. Communication with the company's account manager should be maintained. Banks will r ecognize loyal customers and may be willing to assist in a crisis. 4. On-Time payments: Protect the creditworthiness of the company. Metrics to Monitor Effectiveness A p lan cannot be deemed successful unless the desired change is acquired. Ongoing p rocesses must be in place to monitor the success of the capital management policy. Can the company now predict, with a reasonable margin of error, the company's cash f low needs? T his can be done with a cash budget. If the company is not attracting new customers, the credit terms may be too fi rm or it could simply be supply and demand. Areas need to be monitored to pinpoint where the plan needs tweaking or if a t r ip back to the drawing board is needed. In the case of Dicks sporting goods, I will discuss two major metrics that can be used to monitor the effectiveness of the working capital policy: Cash Conversion Cycle (CCC), and Average Collection Period. Cash Conversion Cycle measures how long working capital is "tied up" in covering p roduction cost (Maysami, 2007). The goal is to minimize the CCC and free up cash for other business opportunities. If Dicks sporting goods CCC does not reduce, then areas need t o be reviewed for improvements. Some areas to be evaluate would be the t ime it takes to get the finished product delivered and the collection policies. Longer CCC creates greater dependencies on short-term financing to pay the bills until money is collected. A shorter CCC would indicate the new policies are working. T he average collection period measures the length of t ime it takes before a company is paid for a sale. Monitoring the average collection period reveals if the credit policy is effective or if the collection policies are effective. Using the credit policy on pages 4-5, if the average collection period decreased to 7 days, then the discount rate offered might be said to
be effective. A substantial decrease in the average collection period can also be accredited to t he fi rmer collection policies. Companies t rying to tighten up on collections must also be careful not alienate customers.
Conclusion D icks sporting goods issues and opportunities can be addressed with working capital policies and tools. A cash budget can assist the company in predicting its cash needs. M aintaining cash reserve can prepare the company for any opportunities or emergencies t hat may arise. To help lower the dependency on the line of credit, strong credit policies such as collection policies, credit terms and invoices to monitor cash inflows must be established and maintained, negotiations with suppliers can assist in monitoring cash outflows and alternative short-term financing can keep Dicks sporting goods from paying h igher interest rates. Evaluating cash conversion cycles and average collection periods as an indicator if the proposed planned has been successful. Dicks sporting goods need of a sound capital working policy is to keep cash to grow the business while experiencing a continuous growth of customers and reliable suppliers.
References Danh, Voi. (1999). Working Capital Policy. Retrieved January 23, 2008, from http://www.ctu.edu.vn/coursewares/kinhte/qttc/abstract/ch10.htm Gray, Andi. (2006). The ups and downs of cashflow. Fairfield County Business Journal. Retrieved January 23, 2008, from www.fairfieldcbj.com Maysami, Ramin. (2007). Understanding and controlling cashflow. Retrieved January 23, 2008, f rom http://www.sba.gov Myers, R. (2006). How low can i t go?. CFO, 22(10), 79-88. Retrieved Tuesday, January 25, 2008 from EBSCOhost database Score. (2007). Prepare a cash budget. Retrieved January 25, 2008, from http://www.va -interactive.com/score University of Phoenix (2007). Dicks sporting goods working capital policy. Retrieved January 24, 2008, from University of Phoenix, rEsource, Simulation, MBA550-Resource M aximization website