ANAGEME

NT
L
ANCIA

Working
FIN

CAPITAL
Presented by: Group 5
 MEANING & COMPOSITION OF
1 WORKING CAPITAL

2 THE NEED FOR WORKING CAPITAL

MANAGEMENT OF WORKING
3 CAPITAL

4 LIQUIDITY MANAGEMENT

5 CASH MANAGEMENT

ACCOUNTS RECEIVABLE
6 MANAGEMENT

7 INVENTORY MANAGEMENT
Working
Capital
What is working capital? Let’s first
go through an intuitive example of
what high working capital needs
and low working capital needs are.
 Working Capital
To obtain revenues, the firm strives to
provide customers with products or
services. To achieve this, various inputs
are required, all in need of adequate
funding.
 Positive Working
Capital
VS.
Negative
Working Capital
 Meaning
and Working capital refers to

Composition that part of the capital of

the company which is
of working continually circulating.

capital
 Working capital may be described
in 2 ways:

Gross working Working Capital

Capital
The total amount of the firm's The total amount of current assets
current assets. minus current liabilities.
The gross working capital of the firm is usually
composed of the following:
1. cash in the firm's safe
6. supplies
2. checks to be cashed

7. inventories
3. balances in the bank

8. prepaid expenses
4. marketable securities( not
including stocks in subsidiaries
9. deferred items
5. notes and accounts receivable
The Need for Working Capital
WORKING CAPITAL IS REQUIRED FOR THE FF PUPOSES

Replenishment of Provision for Operating

Inventory Expenses

.

Support for Credit

Provision of a Safety Margin
Sales

 The firm needs cash to pay for

expenditures that arise from
time to time. Even if the
Cash anticipated cash receipts is
Requirements equal to the anticipated cash
expenditures, it is still
necessary to maintain a
sufficient cash fund for the firm
to meet its cash commitments.
The amount of cash needed
depends upon the following:
1. The amount of the firm's purchases and cash sales

2. The time peroid for which the firm receives and grants credit

3. The time period from the dates of purchase of raw materials and
payment of wages to the dates of cash receipts from sales

4. The amount of cash to be used for investment in inventories

5. The amount of cash needed for other purposes such as cash dividends
 Accounts receivable
Requirements

Since liquidity is a primary concern of sound

business finance, firms prefer cash sales
over credit sales.
Inventory Requirements

The production of large stocks of inventory

generate savings as a result of lower
production cost. It will also provide the firm
with large quantity of stocks to meet
increasing or unusually large orders from
customers.
 Management of Working
Capital
Working capital must always be able to cover fund
requirements of the company as they are needed.
To overcome this, a system should be
adopted considering the ff objectives
1. The capital must be adequate to cover all current financial requirements

2. The working capital structure must be liquid enough to meet the current
obligations as they fall due

3. The working capital must be conserved through proper allocation and

economical use

4. Working capital must be used in the attainment of the profit objectives of

the firm
Liquidity
 Liquidity Liquidity

Management refers to the ability of the firm to

pay its bills on time or otherwise
meet its current obligations.

Liquidity Management
refers to the activities geared
towards achieving the liquidity
objectives of the firm
 The Cash inflows of the firm come from
various sources which are briefly described as
follows

Collections of Accounts
Cash Sales- the percentages of Receivable- the credit policies
cash derived from sales vary and the pattern of company
from company to company and sales determine the frequency
from industry to industry and volume of collections from
receivables
 The Cash inflows of the firm come from
various sources which are briefly described as
follows

Loans- loans from banks and

other creditors may be availed
Sale of Assets- Assets are
of by management mostly on its
sometimes sold by the
own initiative. The timing and
company for various reasons.
amount of cash receipts derived
Obsolence is one of those.
from loans depend largely on the
borrowing
 The Cash inflows of the firm come from
various sources which are briefly described as
follows

Advances from the

Ownership Contribution-
Customers- Manufacturers, at
Additional contributions from the
times, require cash advances
owners are sometimes tapped to
from customers as soon as an
improve the liquidity posture of
order is made and before
the firm
production is started
Cash
Management
 Cash Management
To effectively manage cash, 5 major approaches are suggested. Theses are as follows:

1.Exploit techniques of money

mobilization to reduce operating
requirements for cash
4. Develop explicit alternative
sources of liquidity
2. Expend major efforts to increase
the precision and reliability of cash
flow forecasting 5. Search aggressively for more
productive uses of surplus money
3. Use maximum efforts to define and assets
quantify the liquidity reserve needs of
the firm
 Remittances from far
Money flung branches which would take
days before they are converted
mobilization to cash and check payments sent
through mail.

 Improved Cash Flow

Forecasting

A cash flow forecast with a high degree of

precision and reliability provides the firm
with realistic approaches to planning and
budgeting.
 Improved Cash Flow Forecasting

The advantages brought by an improved cash flow forecast are the

following:

2. Alternative methods of 3. The creation of special

1. Surplus funds are more meeting the outflows can reserves for major future
fully invested; be explored; and outlays will be minimized

Defining and
Quantifying
Reserve Cash must be
The Liquidity maintained for uncertainties
Reserve and contingencies.

Needs of the
Firm
Defining and Quantifying the Liquidity
Reserve Needs of the Firm.
SEVERAL STEPS ARE NECESSARY TO ACCOMPLISH THIS OBJECTIVE. THESE ARE THE FOLLOWING:

1. Identification of 2. Assessment of the

contingencies requiring probabilities of the
protection; contingencies occurring;

3. Assessment of the 4. Assessment of the

probabilities of the probable amount of cash
contingencies occurring required if each of the
at the same time; and contingencies happens.

Development of Exploitation of unused borrowing

Alternative capacity.

Sources of Interbusiness financing - credit

Liquidity flowing from large business to

small business.

Search for More Productive

Uses of Cash Surplus

Cash surplus may be utilized to earn

higher returns.
Planning activities must also be geared
towards eliminating the unproductive or
less productive gap.
 Accounts receivable management
consists of the methods and
Accounts processes that companies use to

Receivable understand from a financial

perspective how much money is
Management owed to them from their
customers and go about collecting
the owed payments.
Accounts
Receivable
.
 Accounts Receivable
Management
consists of the methods and processes that companies
use to understand from a financial perspective how much
money is owed to them from their customers and go
about collecting the owed payments.
 Accounts Receivable
Management
Objectives of Accounts Receivable Management

Determine the cost and profitability of

credit sales
Projection of cash flows from receivables
Direction and control of activities involved in
the extension of credit to customers
Elements of the Cost of
Credit

Bad debts cost Cost of invested Administrative

fund cost

 1. Gathering and organizing of

information necessary for
decisions on the granting of
credit to particular customers

Functions 2. Assuring that efforts are made to

Of Credit collect receivables when they
become due
Department
3. Determining and carrying out
appropriate efforts to collect
accounts of customers who
cannot or do not intend to pay
 Sources of Credit Information

1. Personal interviews
4. Credit-reporting
agencies

2. References
5. Banks

3. Credit bureaus
 Personal Interviews
This provide basic information concerning
an applicants for credit card.

The applicant is usually required to fill up credit application blank.

The credit application contains the following items:
1. the name of the applicant;
2. residence and former address;
3. occupation or business;
4. business address;
5. bank where the applicants maintain an account and
6. property owned.
Reference Banks
The credit applicant is Constitute a valuable source of
usually required to credit information
furnish names at least
three credit references
Credit bureaus Credit reporting
agencies
Are institutions organized for the
exchange of ledger information
among associated creditors. consist of more
Among the services rendered by
credit bureaus are the following: specialized forms of
1. reports credit bureaus
2. bulletins
3. credit guides
4. special services
Evaluation of credit
Risk

C apital C haracter
C apacity C onditions
 Inventory Management
refers to the activity that keeps track of how many of the
procured items needed to create a product or services are on
hand, where each items is, and who has responsibility for each
of them
A successful inventory management program's
main objective is to strike a balance among 3 key
elements

Customer service
Inventory investment
(in terms of pesos or dollars)
Profit
 Functions of inventory
1.They serve to offset errors contained in the forecast of
the demand for the company's products.

2.They often permit more economical utilization of

equipment, buildings and manpower when the nature of
business is such that fluctuations in demand exist.

3. It permits the company to purchase or manufacture in

economic lot sizes.
Forms of Inventory
Raw materials

Work-in-process

Finished goods
Methods of Achieving Inventory Goals

1. The ABC method 2. the economic order

quantity method

3. the safety stock

4. the anticipation
stock
Economic Order Quantity
 The Economic Order Quantity (EOQ)

Two Major Costs: EOQ Formula EOQ= the square root of 2 US/CI

EOQ = Economic Order Quantity

1. Carrying costs U = annual usage
(warehouse storage S = restocking or ordering cost
costs) C = cost per unit
I = annual carrying cost (expressed as percentage
of inventory value)

2. Ordering costs Thus, if annual usage is P1000, cost per unit is P5000,
an annual carrying cost is 10%, EOQ is:
EOQ = the square root of 2 x 1,000/ 5,000 x 10%
= 20
Thank you for
listening!