Directions: Try to guess the following pictures.

Working capital

• The firm’s total investment in

current assets.
• refers to the company’s
investment in short-term asset
such as cash, inventory, short-
term marketable securities, and
account receivable
Working capital management
•is the proper administration of current assets
and liabilities.

Good working capital management enables the

firm to pay its financial obligation, establish good
relationships with suppliers and creditors, and
improve the earnings of the company.
 Working capital
• Current assets – are assets that are likely to be
converted into cash, sold, exchanged, or
expensed in the normal course of the business
usually in a year.

• Current assets like cash, accounts receivable,

inventories, and prepaid expenses used in the
operations of the business.
Net Working capital

• Is the difference between the

firm’s current assets and current
liabilities.
• Net Working capital = Current
Assets – Current Liabilities
Net Working capital

• Current liabilities are debts and

other obligations coming that fall
due within 1 year.
example
The total assets of Steve Rich Corporation amounts to Php
20,000,000.00 and its total current liabilities amounts to Php
16,000,000.00.
Answer:

• Theworking capital of Steve Rich Corporation is

Php 20,000,000.00.
• The net working capital of Steve Rich
Corporation is Php 4,000,000.00 (Php 20,000,000
– Php 16,000,000.00)
•If the firm’s current assets exceed its current
liabilities, the firm has a positive working capital.
On the other hand, if current liabilities exceed
current assets, the firm has a negative working
capital.
Working capital
management
• Includes the administration of
each current asset account such
as cash, marketable securities,
accounts receivable and
inventory.
• It also includes the
administration of each current
liability.
Working capital
management
• refers to the efficient management of the
firm’s current assets (cash, receivables,
and inventory) and current liabilities
(short-term payables). Through working
capital management, managers have
given the challenge to balance risk and
profitability that comes along each
current asset and liability to contribute
positively to the firm’s value.
Policy on the level of current assets
• Policies on current assets should dictate the appropriate amount and
mix of current assets that must be maintained in order to achieved
the objectives and goals of the business organizations.
• The basic questions:
• What is the level of currents asset that the business should maintain
in terms of:
1. Its total amount in relations to total assets?
2. The respective amounts allocated to each current asset account in
relation to total currents assets.
Example
The total resources of the business is P5,000,000. in case
the business adopts a working capital policy that 60% of
the total resources shall be allocated to the currents
assets, then an amount close to P3,000,000 (5,000,000
X60% shall be provided for such requirements, the
remaining P2,000,000 worth of resources shall be
allocated to non-current assets or fixed assets.
• Current assets are those that you can convert into cash
within one year, such as short-term investments and
accounts receivable.
• Non-current assets are longer-term assets with a full
value that you cannot recognize until after one year, such
as property and machinery.
• Non-current assets can be both “tangible” and
“intangible”, that is, things you can physically see and
touch as well as resources that do not have a physical
form. Current assets are categorized as “liquid” or “more
liquid” depending on how quickly you can convert them
into cash.
Factors to be considered in the process
of evaluating the level of current assets
• Nature of business
• Types of items produced or sold.
• Current industry practices.
• Government policies and programs
• Manufacturing process involved
• Credit terms of suppliers and customers.
3 types of working capital Financing Policies
•Conservative working capital policy
•Aggressive working capital policy
•Maturity- matching working capital financing
policy
•There are of the temporary working capital
requirements that are financed by long-term
sources of financing.
•Some companies use this policy because they
don’t want to be stressed too much and to be
focused on other company’s matter. It can also
be their management style. It will be easy for the
company to raise funds (Cayanan and Borja,
2017).
Permanent or fixed working capital

•refers to the minimum level of current

assets required by a firm to continue the
operations of the business and to cover up
all current liabilities.
Temporary working capital

•is the difference between net working

capital and permanent working capital. It
can help the business survive during the
slack season.
•Temporary working capital = Net working
capital – permanent working capital
Long-term sources of financing and Short-
term sources
•Long-term sources of financing include long-
term debt like loan from a bank and equity such
as common stock and preferred stock.
• Short-term sources include short-term loans
from a bank.
Aggressive working capital policy
• Most of the resources of the business are tied up to
non-current assets. Higher investment on non-current
gives higher return to the business, but the risk involved
is likewise higher as well.
• Requires smaller amounts of cash, receivables and
inventories.
•Some of the permanent working capital
requirements are financed by short-term
sources of financing. Managers use this kind of
policy because long-term sources of funds have
a higher cost as compared to short-term sources
of financing. By financing some of the
permanent working capital requirements with
short-term sources of financing, the financing
cost is minimized, which in turn, improves net
income.
what is the trade off?
•This refers to liquidity risk and this risk increases
with the aggressive working capital financing
policy.
•Since it is short-term, the debt has to be paid
soon and the company may not yet have enough
cash by the time the debt matures.
Maturity-matching working capital financing
policy
. The permanent working capital
requirements should be financed by long-
term sources while temporary working
capital requirements should be financed by
short-term sources of financing.
Cash Management
•Cash management involves the maintenance of
a cash and marketable securities investment
level which enables the company to meet its
cash requirements and at the same time,
optimize the income of idle funds (Cabrera,
2015).
•The objectives of cash management are to meet
the financial obligation of the firm and to avoid
losses in the normal operation of the business.
Specific objectives of financial manager
•To meet the cash disbursement needs.( payment
schedule)
•To minimize the funds committed to transactions
and precautionary cash balances and;
•To avoid misappropriation and handling losses in
the normal cause of business.
Reasons for Holding Cash
• Transaction Motive – Cash is needed for the day-to-day
operations of the business.
• Contractual Motive – Some banks require a company to
maintain a certain compensating balance for their deposit
accounts and loans
• Precautionary Motive – Firms hold cash to be ready in case
of unwanted situations such as slowdown of accounts
receivables that may affect the fund for operations
• Speculative Motive – A company holds cash for other
investment opportunities.
Cash budget
•is used in determining the cash needs of the
company. It shows the projected cash receipts
and cash disbursements for a particular period
of time
Receivables Management
•Providing credits to a customer is one way of
increasing sales and gaining additional
customers. Properly managing the accounts
receivable lets the company continue its
operations. To minimize loss from accounts
receivable, the customer must be given credit
terms and credit evaluation must likewise be
done.
The following 5C’s of credit can be used in
credit evaluation.
1. Character – is the borrower’s willingness to pay the
loan.
2. Capacity – is the borrower’s ability to pay the loan.
3. Capital – is the borrower’s financial resources.
4. Collateral – is the borrower’s security pledge for the
loan payment.
5. Condition – is the current economic or business
conditions.
Inventory Management
• Inventory is the stocks of the product the business is
selling and the parts or raw materials that made up the
product.

• Inventory management is very important for

manufacturing and merchandising companies especially
companies with perishable products. There should be a
sufficient number of inventories to secure the smooth
operations of the business.
The following are the list of internal controls that
management should consider in to protect their
inventories.
1. Separating the custodial functions from recording
functions. The company should not allow the assignment
of custodial functions from recording functions to one
person to avoid manipulation of records.
2. Aging of inventories. It allows the company to decide
what to do with slow-moving items. For example, they
can use bundling or buy one take promo.
3. ABC Analysis. This approach categorizes the
inventories according to their values. A is
considered the most important inventory or with
the highest values, B is considered the average
item and C is the least important or has lower
value.
Cash flow cycle
• The cash flow cycle of a firm influences the amount of growth which
can be financed without causing cash flow problems.

• Is the length of time required to convert raw materials into finished

goods, inventories into receivables, and then receivables into cash.