Working Capital
Management
1
Working adults struggle to
balance work and social life in
addition to household
budgeting. Some face financial
challenges.
2
Most adults think
applying for a
loan can lighten
the burden.
3
Although a loan can help, it can
also be dangerous if borrowers
do not manage their personal
finance well.
4
Is the cycle of borrowing, financing,
and payment healthy for a
company? Should debts be avoided
altogether?
5
THRIVING OR SURVIVING
Businesses suffered financially during the COVID-19 outbreak. Indeed 2020
was not the year for most newly opened companies to earn as much as they
should be. Many companies faced new difficulties to stay afloat given the
circumstances. Many resorted to practical strategies such as maximizing the
use of the internet.
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THRIVING OR SURVIVING
The transition of the business environment forced owners to give attention to
the efficient management of costs and cash. The outbreak drastically affected
the economy and led the businesses to either thrive or survive this pandemic.
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QUESTIONS TO PONDER
1. What were the financial problems experienced by businesses due to the
pandemic?
2. How do profitability and liquidity affect business performance?
3. What can businesses do to ensure that such problems will be avoided?
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Explain tools in managing cash, receivables, and inventory
(ABM_BF12-IIIc-d-12).
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At the end of this lesson, you should be able to do the following:
● Define working capital management.
● Illustrate working capital management and the management of
cash, accounts receivable, and inventory.
● Identify the different working capital financing policies.
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Does working capital management
significantly impact a firm’s profitability
and performance?
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WORKING CAPITAL MANAGEMENT
It would be difficult to imagine what a company can become
five to ten years from now if it does not maintain a good
performance at present.
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WORKING CAPITAL MANAGEMENT
● a tool designed to ensure that a company efficiently uses
current assets and liabilities
● monitors and maintains adequate cash flow to meet short-term
obligations
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WORKING CAPITAL MANAGEMENT
Working Capital
Management
Guarantees enough
current assets for
operations
Secures financing
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WORKING CAPITAL MANAGEMENT
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WORKING CAPITAL MANAGEMENT
Calculating the Working Capital
Working Capital = Current Assets – Current Liabilities
Working Capital Management involves managing the current assets
and current liabilities.
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Is the working capital enough?
Company XYZ has current assets of ₱500,000 and current liabilities
of ₱300,000. Fixed assets are ₱100,000, long-term debt is
₱100,000, and short-term debt included in the current liability above
is ₱25,000. Calculate the working capital of the company.
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Is the working capital enough?
Step 1: Identify what is required in the problem.
Calculate the working capital of the company.
Step 2: Identify the given in the problem.
Current Assets = ₱500,000
Current Liabilities = ₱300,000
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Is the working capital enough?
Step 3: Write the working equation.
Working Capital = Current Assets - Current Liabilities
Step 4: Substitute the given values.
Working Capital = ₱500,000 - ₱300,000
Working Capital = ₱200,000
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Is the working capital enough?
Step 5: Find the answer.
The company's working capital is ₱200,000. It means that
the company can meet its short-term and long-term financial
needs.
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1
WHAT DOES IT MEAN IF A COMPANY HAS A NEGATIVE
WORKING CAPITAL? WHAT ARE ITS CONSEQUENCES?
Answer area
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WORKING CAPITAL MANAGEMENT
Importance
1. It ensures the company possesses appropriate resources for
its daily operations.
2. It helps the company to maintain flawless operations.
3. It enables the company to improve its profitability.
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WORKING CAPITAL MANAGEMENT
Importance
4. It guides the company in maintaining the balance between its
current assets and liabilities.
4. It helps the company to cover financial obligations and boost
its earnings.
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
CASH MANAGEMENT
● maintains the company's
competency in handling cash
inflow and outflow
● tool: cash flow schedule
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
CASH MANAGEMENT
Objectives:
1. To make payment based on the
payment schedule
2. To minimize cash balance
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
ACCOUNTS RECEIVABLE
MANAGEMENT
● involves the company's credit
standards and policies
● tool:
○ collection ratio
○ 5Cs
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
ACCOUNTS RECEIVABLE
MANAGEMENT
● ability to repay loans
● assessment of debt-toincome (DTI) ratio
CAPACITY
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
ACCOUNTS RECEIVABLE
MANAGEMENT
Looks into the borrower’s:
● Investment
● Savings
● Assets
CAPITAL
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
ACCOUNTS RECEIVABLE
MANAGEMENT
Looks into the borrower’s:
● Property or Land
● Equipment
● Vehicle
COLLATERAL
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
ACCOUNTS RECEIVABLE
MANAGEMENT
Looks into the borrower’s:
CONDITION
● Loan’s interest rate
● Purpose of loan
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
ACCOUNTS RECEIVABLE
MANAGEMENT
Looks into the borrower’s:
●
●
●
●
Educational background
Credit history
Affiliations
Creditworthiness
CHARACTER
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Credit Score
Credit card companies use credit scoring to give an overall rating on
a borrower’s history and capacity to pay debts. They do this to
manage their account receivables.
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Credit Score
The percentage of credit limit, payment delinquencies, foreclosures,
and bankruptcies can affect the credit score of a client. Depending
on a borrower’s credit score, the credit card company can either
increase or decrease the client’s credit limit.
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
INVENTORY MANAGEMENT
ensures a sufficient supply of
materials and prevents shortages
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MANAGEMENT OF WORKING CAPITAL ACCOUNTS
Finished products
Raw materials
Components of
Inventory Management
Work-in-process
Stores and spares
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COMPONENTS OF INVENTORY
RAW MATERIALS
goods or materials needed to
complete a product
ROLLS OF FABRIC
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COMPONENTS OF INVENTORY
WORK-IN-PROCESS
● semi-finished products
● goods need to undergo
some process to become
finished products
SHOP FACTORY
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COMPONENTS OF INVENTORY
FINISHED PRODUCTS
manufactured goods ready for
sale
FASHION STORE
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COMPONENTS OF INVENTORY
STORES AND SPARES
materials that maintain the
proper condition of machinery
and storing goods
WAREHOUSE
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MANAGEMENT OF WORKING CAPITAL
ACCOUNTS
CURRENT LIABILITIES
MANAGEMENT
● managing of accounts payable
● financing through short-term
debt
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2
HOW DO COMPANIES AVOID EXCESSIVE BORROWINGS?
Answer area
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WORKING CAPITAL FINANCING POLICIES
Working Capital
Financing
Policies
Conservative Policy
Aggressive Policy
Hedging Policy
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WORKING CAPITAL FINANCING POLICIES
CONSERVATIVE POLICY
least risky method, low
profitability
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WORKING CAPITAL FINANCING POLICIES
CONSERVATIVE POLICY
utilizes long-term financing to
cover permanent working
capital and fluctuating current
assets
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WORKING CAPITAL FINANCING POLICIES
AGGRESSIVE POLICY
risky method but has the
highest chance for
profitability
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WORKING CAPITAL FINANCING POLICIES
AGGRESSIVE POLICY
The permanent working
capital and fluctuating
current assets are financed
through short-term
financing.
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WORKING CAPITAL FINANCING POLICIES
HEDGING POLICY
also known as matching
policy
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WORKING CAPITAL FINANCING POLICIES
HEDGING POLICY
● finances permanent
current assets through
long-term financing
● the fluctuating current
assets are financed
through short-term
financing
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3
EXPLAIN THE SIGNIFICANT DIFFERENCE AMONG THE
THREE WORKING CAPITAL FINANCING POLICIES.
Answer area
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The Impact of Working Capital Management on Profitability
A quantitative study was conducted to investigate whether the
efficiency in working capital management significantly affects firms'
profitability. The study looked into the data of 719 Polish-listed firms
from 2007 to 2016.
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The Impact of Working Capital Management on Profitability
The study results show that debt ratio and cash ratio are statistically
significant determinants of profitability. At the break-even point,
working capital has a positive effect on profitability. However, after
that point, working capital negatively impacts profitability.
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The Impact of Working Capital Management on Profitability
The study recommends that managers avoid negative profitability
effects (lost sales, lost discounts for early payments, and
supplementary financing expenses). They should also avoid greater
investment in working capital; instead, they should focus more on
profitable investments.
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● Working capital management monitors and maintains various accounts to
ensure adequate cash flow to meet short-term obligations. Since current
assets tend to fluctuate, working capital management also involves the
methods and policies in capital financing.
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● Working capital is computed by getting the difference between current
assets and current liabilities:
Working Capital = Current Assets – Current Liabilities
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● Working capital management specifically looks into the current assets and
current liabilities accounts.
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● There are three methods of working capital financing policy: conservative,
aggressive, and hedging. These methods are differentiated by the extent of
long-term and short-term financing plans of a business.
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Identify the concept being described in the statement.
1. It is a business tool designed to ensure that a business firm
has the sufficient cash flow to settle short-term obligations.
Answer area
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Identification. Identify the concept being described in the statement.
2. It involves a company’s credit and collection policy to avoid
extending credit to unreliable debtors.
Answer area
58
Identification. Identify the concept being described in the statement.
3. These are options and techniques in obtaining cash while
waiting for unpaid invoices.
Answer area
59
Identification. Identify the concept being described in the statement.
4. It ensures that stocks are neither excessive nor insufficient.
Answer area
60
Identification. Identify the concept being described in the statement.
5. It is an activity that maintains efficient cash inflow and outflow.
Answer area
61
Answer the given problem.
1. Company MNL listed its liabilities. Based on their records,
short-term debt amounted to ₱450,000. The company's
current assets are ₱800,000 and current liabilities of
₱500,000. Will the company be able to settle and meet its
short-term obligations? Why or why not?
Answer area
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Answer the given problem.
2. Company QRS recorded the fluctuating current assets for
January, February, and March as ₱150,000, ₱75,000, and
₱113,000. The financial managers decided to acquire shortterm debt equivalent to the level of fluctuating current assets.
What working capital policy is Company QRS implementing?
Explain your answer.
Answer area
63
Answer the given problem.
The COVID-19 pandemic affected the world economically. If you
are a business owner trying to survive, which financing policy
would you use? Explain your answer.
Answer area
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Answer the given problem.
Many businesses, including automobile manufacturers, have
implemented the Just-in-Time System. In this system, factories
only produce goods that clients have already ordered. Only the
exact or near-exact amount of materials and labor are employed
by the company. What kind of working capital management is justin-time production? Explain your answer.
Answer area
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